Navigating the waves and winds of tech investments: from quarterly earnings to long-term horizons

Long-term trends in tech investments

In the world of technology investments, it is essential to underline the long-term structural growth. Tech companies are often in a constant state of innovation and development, which means that their true potential sometimes only becomes clear over longer periods. This is similar to navigating a long sea voyage: temporary storms can slow progress, but it's the overall direction and the ability to navigate through these storms that ultimately determine success.

Quarterly earnings spotlight: the market's reaction to five of the Magnificent 7

Although the focus on long-term growth is undeniably important, the importance of short-term achievements, particularly quarterly results, cannot be overlooked, leading us to a significant juncture observed in recent days—a tsunami of tech earnings results. Notably, the five horsemen of the Magnificent 7, namely Microsoft, Apple, Alphabet, Amazon, and Meta Platforms, have emerged as key protagonists.

Microsoft and Alphabet disclosed their earnings on Tuesday, setting the stage for a tense market anticipation a day before Jerome Powell's update on the interest rate outlook. The market's response to their earnings release was notably subdued. Microsoft's shares dipped by 1.9%, while Alphabet experienced a sharp decline of 7.5% in the aftermath of their announcements. When it came to Apple, Amazon, and Meta Platforms, which reported their results on Thursday evening, the market's reaction was more varied. In the pre-market trading on Friday, Apple's shares were down by 2.5%, whereas Amazon and Meta Platforms saw their shares increase by 6.3% and 16.5% respectively. Despite the initial market movements, we recognize that all these companies reported solid results, showcasing re-accelerating growth drivers in crucial areas such as advertising, cloud services, AI-customer engagement, AI-investments, and e-commerce.

Understanding the ‘actual temperature’

This phenomenon mirrors the complexities of understanding the stock market, akin to interpreting the weather. Much like meteorologists account for the wind chill in expressing how cold it truly feels, investors ought to consider more than mere numbers to gauge a company’s short term share price evolution.

The basis: company results as 'actual temperature'

Let's start with the basics. In meteorology, the actual temperature is an objective measure. In the world of the stock market, these are the fundamental company results: revenue, profit, profit margins, cash flow generation and other quantifiable financial and operational data. These figures are the backbone of corporate analyses, similar to how temperatures are the starting point for weather forecasting.

Market sentiment: the 'feels like' temperature of the stock market

However, a company's stock price is more than a simple reflection of its basic results. Just as the wind chill factor takes into account wind and humidity, the stock price includes investors' perceptions and expectations, market sentiment, and external economic factors. These elements can significantly influence the 'felt' value of a stock, separate from the underlying company figures. Just as wind chill can make it feel colder than the actual temperature, macro-economic economic uncertainties or investor positioning going into the results announcement can make a stock less attractive, even if the company results are strong. Conversely, a positive market sentiment, such as confidence in the sector or favorable economic conditions can warm a stock above its base value. It's interesting to note that the market's lukewarm response to Microsoft and Alphabet's earnings was partly shadowed by the anticipation of the Federal Reserve’s meeting Wednesday evening (nobody was really bothered by the liquidation order on China’s Evergrande), while ahead of the Apple, Amazon and Meta Platform’s results publication, the US-10 year bond yield again dipped below the 4%. These 2 examples highlight how such external events can significantly temper or amplify the investor response to corporate earnings.

As illustrated, the stock market world is complex and layered, just like the weather. By applying the analogy of the wind chill factor, we can gain deeper insight into how external factors influence stock prices, even when the fundamental foundations seem strong. Just as a smart hiker accounts for wind and humidity, a smart investor must look at the broader economic 'weather' surrounding to understand what is actually happening with their investments.

Measuring the true temperature of this weeks Magnificent 7 earnings

Now that we've established the context of the market's initial reactions and the external factors at play, let's pivot to a brief examination of the earnings results of Microsoft, Apple, Alphabet, Amazon, and Meta Platforms:

Microsoft: The software and cloud company reported Q4 revenues of $62 billion, up 17.6% YoY, showcasing a strong acceleration in growth compared to previous quarters. The intelligent cloud division, which includes Microsoft's Azure Cloud business, achieved robust growth of over 20%, with Azure sales surging to 28%. Notably, 6 points of Azure's growth were attributed to AI services like Azure OpenAI. However, Microsoft refrained from commenting on the uptake of its recently launched Copilot. A solid product mix resulted in a strong gross margin of 68%, and effective cost management led to an operational result of $27 billion for the quarter, marking the company's highest-ever quarterly profit and a re-acceleration of profit growth. This translated into a solid free cash flow of $9 billion, with $8 billion returned to shareholders through dividends and share repurchases. The outlook was solid.

Alphabet: The advertising giant reported revenues of $86 billion, marking a robust 13.5% YoY growth, demonstrating an acceleration compared to previous quarters and surpassing expectations. Google's advertising revenues, representing nearly 76% of total revenues, achieved an 11% growth, the highest in 6 quarters, albeit 0.3% lower than market expectations. Notably, Google outpaced Microsoft with Bing in the growth of its search ad business. Google Cloud recorded solid revenue growth of 26%, reaching $9.2 billion, poised to cross the $10 billion mark in the coming quarters. The overall operational profit surged to $23.7 billion, a remarkable 30.5% increase and the highest growth rate in 8 quarters. The Cloud margin expanded to 9.4% and continues its upward trajectory. Free cash flow, impacted by a $10.5 billion tax payment in October, amounted to $8 billion. The company continued a substantial buyback program of $16 billion. Overall, a strong operational performance with a bright outlook.

Apple: The smartphone giant reported revenues of $120 billion, marking a modest 2% growth. This turnaround follows four consecutive quarters of negative sales growth. The revenue strength was driven by the iPhone business, representing 58% of total revenues, which grew by 6% YoY. This growth is notable considering the overall decline in the smartphone market. Apple's Services business also showed robust growth, increasing by 11%. However, there were pockets of weakness in the iPad and Wearables, Home, and Accessories segments. Apple proudly announced the availability of Apple Vision Pro in U.S. Apple Stores starting today, with plans for global expansion later this year. According to Tim Cook, Apple Vision Pro is a revolutionary device built on decades of Apple innovation, positioning it years ahead of the competition. Geographically, Apple faced challenges in China, with a revenue decline of 13%. Despite these headwinds, the company achieved a 12% increase in operational results, reaching $40 billion, aided by proper cost management. Apple's free cash flow surged by 24%, the highest growth rate in 8 quarters, to $37 billion, resulting in a free cash flow margin of 31%. During the quarter, Apple returned nearly $27 billion to shareholders, including $4 billion in dividends and $20 billion through share repurchases. Lastly, the outlook for the next quarter appears soft, with indications of a slight decline in revenue.

Amazon: The e-commerce and cloud giant reported revenues of $170 billion, reflecting a 14% increase. This marks the fifth consecutive quarter of accelerating revenues. Approximately 86% of total revenues are attributed to the e-commerce business, with the remaining portion coming from Amazon's AWS cloud business. Andy Jassy, Amazon's CEO, highlighted two key aspects of its e-commerce business: a record-breaking holiday shopping season and the regionalization of the U.S. fulfillment network, resulting in faster delivery speeds. AWS concluded the quarter with a series of customer wins and new partnerships, with AI playing an increasing role in enabling new business opportunities. The operational profit reached $13 billion, nearly five times higher than the previous year. Amazon's free cash flow amounted to $28 billion, signaling a departure from the days of negative free cash flow due to substantial investments in future growth. This positive shift has raised questions during the results conference call about whether Amazon might consider using its growing cash balance for share repurchases or dividends. While Amazon's CFO indicated he hasn't taken concrete actions on this front yet, it's evident that shareholder pressure is mounting on this issue.

Meta Platforms: The social metaverse company, as they currently call themselves, reported revenues of $40 billion, growing 24.7% YoY, and you guessed it right, also Meta Platforms revenue growth accelerated versus the previous quarter. In terms of revenues, Meta is and remains foremost an advertising related social media company with 97% of its revenues coming from its Family of Apps (Facebook, Instagram, Reels, Whatsapp, Messenger, Threads, Workspace). The company indicated that ad impressions delivered across its Family of Apps increased by 21% YoY and the average price per ad increased by 2% YoY. In particular the average price per ad registered a solid improvement versus previous quarters, as the full year figure still points to a 9% decrease. The remaining 3% of total revenues is generated by Meta’s Reality Labs, which largely relates to Meta’s sales of VR/AR/XR hardware. Assuming an average selling price of about $400, one can assume the company sold less than 2.5 million headsets in the holiday shopping quarter. While the revenue growth was remarkable solid, the company’s operational profit was even more remarkable. The company reported an operational profit of $16.4 billion, roughly 2.6 times the level of last year, and by far the highest level ever. This realization is even more impressing, as the company did report an operational loss of $4.6 billion for its Reality Labs business. These remain heavy “start-up losses”, but the company believes that the AR/VR/XR market can become as large as the PC or smartphone market (FYI these markets are currently roughly $200 and $500 billion in size). Taking into consideration considerabel investments in servers, datacenters and network infrastructure, free cashflow nevertheless still amounted to $11.5 billion. In the fourth quarter, Meta repurchased $6.3 billion of its own shares, bringing its total share repurchases for the full year to $20 billion. At the same time they obtained the stock repurchase authorization for an additional amount of $50 billion, bringing the total above $80 billion. Finally, the company also announced that, going forward, it aims to return a portion of capital to its shareholders through a regular dividend.

 

Conclusion: the dual forces shaping tech investments

In conclusion, technology investments are influenced by both the undercurrents of long-term growth and the waves of quarterly results. For investors, navigating this dynamic environment requires a balance of attention to immediate data and an understanding of the enduring trends that shape the industry's future.