• Reinhardt Coetzee

Tech Earnings Season Update

We are now a few weeks into earnings season. The market has been nervous that this round of results could mark a real slowdown in revenue growth for tech companies, particularly after all the cautious guidance during the previous earnings season.

So far that hasn’t really been the case and growth remains robust, apart from isolated instances. However, there has still been some irrational behavior, with sharp knee-jerk reactions to earnings reports.

Big tech

The four largest tech companies all delivered quarterly financial results that impressed the market. It’s amazing how these companies continue to deliver such strong revenue growth off such a high base.

Some of the highlights included:

  • Apple managed to record revenue despite serious supply chain issues

  • Microsoft once again delivered strong margins and cash flows across all its product lines.

  • Alphabet grew revenue by 32% after nearly doubling sales in the last two years.

  • Amazon proved that AWS isn’t losing momentum, while it also delivers a growing share of revenue and operating income. Amazon is also raising the subscription price for Prime – a sure sign that it knows it has pricing power.

Facebook/Meta Platforms

Facebook’s share price fell sharply once again after earnings that reflected rising expenses and a business losing momentum. These results shouldn’t have been a surprise after the company’s rebranding to Meta Platforms.

#Facebook has simply reached a point where it already has so many subscribers that it’s incredibly hard to keep growing. This is the reason for the pivot to the metaverse, and the reason the company is now investing so much in the metaverse segment.

How and when these investments payoff is very difficult to predict at this stage. In the meantime, the social media business is still generating nearly $40 billion in annual profits, and the downside is now a lot lower than it was when the share price was at $380.

Streaming services

#Netflix was an example of a very sharp knee-jerk reaction to earnings numbers, with the share price falling 20% immediately after the results were released. The main concerns were weak guidance and the fact that the company didn’t hit its target of 222.1 million paid subscribers during the quarter.

If we take a step back, the actual figure of 221.8 million subscribers was just 300,000 or 0.13% below that target. And Netflix still added 18 million subs during the previous year, with 8 million added in just the last quarter. The market has clearly become overly sensitive to subscriber numbers – when margins are arguably far more important now.

#Disney was a very different story as the company beat expectations across the board, with more Disney+ subscribers than expected, and a very strong recovery from the Parks, Experience and Products segment. Disney is clearly now the preferred streaming stock to own – but there are compelling reasons to own both.

#Spotify’s results have been overshadowed by the Joe Rogan controversy. The backlash against Spotify seems to have already lost momentum and may have created the best opportunity to buy Spotify in years. The results indicated very strong business metrics. Revenue continues to grow steadily, and while the net margin is still negative, the company is cash-flow positive.

It's all about market sentiment now

A lot of tech companies are looking compelling at the current levels. However, whether or not we have seen the low will depend on sentiment over the next few months, rather than valuations. The three major issues driving sentiment at the moment are inflation, interest rates, and the situation on the Ukrainian border. These concerns should ease in the coming months, but of course, nothing is certain in the short term.

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© 2022 by reinhardtcoetzee.com

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