The majority of tech’s big hitters have reported results in the last couple of weeks. As bellwethers of industry, the likes of Apple, Amazon and Meta can tell us a lot about consumer behaviour. As some of the most popular investments in the world, there’s always a lot of interest in what these titans have to say.
We’ve put together a quick-fire round up of the biggest takeaways from this earnings season.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments, and any income from them, will rise and fall in value, so you could get back less than you invest.
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Takeaway 1 – Apple’s iPhone sales are slowing
Apple's quarterly sales shrank for the first time in three and a half years. That’s partly because of production problems in China, but also because of weaker consumer spending. When times are tough, buying a new $1,000 phone can wait.
We don’t expect this problem to be immediately ironed out. The Federal Reserve has just raised interest rates by another 25 basis points, which makes borrowing more expensive for those buying devices on credit. At the same time, China’s manufacturing recovery is fragile and could change at short notice.
We can’t rule out further downwards pressure on the valuation in the short term. Longer term, we’re still positive on the future outlook for Apple. Remember though, nothing is guaranteed.
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Takeaway 2 – Amazon’s margins don’t have a clear path to growth
Amazon's quarterly profits fell to $2.7bn from $3.5bn the previous year. This is because of losses in its core retail business, especially International (regions outside North America). Amazon expanded very quickly after the pandemic, in anticipation of continued elevated demand for online shopping.
Sadly, tough economic conditions mean there aren’t enough sales to make all that extra infrastructure profitable. Amazon is trying to address this by undergoing restructuring, including redundancies.
In the important US region, we know consumers have burnt through a lot of their lockdown savings. That means we could see further pressure for Amazon, and other businesses that rely on people spending on non-essentials, by the middle of the year. That will make it more difficult to inflate margins.
Luckily, Amazon has Amazon Web Services, which includes its cloud business. This is very profitable and is an exciting growth opportunity in our opinion. This remains a long-term attraction for Amazon stock, but the near-term outlook is still murky.
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Takeaway 3 – markets care about spending plans more than you think
Meta, which owns Facebook, Instagram and WhatsApp, posted better than expected revenue last quarter, even though this marked a 4% slowdown. That’s because advertising revenues are slowing because of harsh economic conditions. The market was relieved to hear Meta’s ad revenues, although tough, weren’t worse than predicted.
The huge upwards readjustment in Meta’s valuation was more to do with the group’s plans for spending. It’s going to reduce capital and operating expenditure, and refocus on its core family of apps (those social media and messaging platforms). This marks a serious change in direction from throwing everything, and more, at the untested Metaverse.
While spending is still elevated, the group’s promised to make this year the year of efficiency. That’s a sensible move when investors are jittery – now isn’t the time to spend its money on fantasy products.
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Things to remember
- Consumer discretionary stocks, which sell non-essential goods and services, are in a tricky spot at the moment, because peoples’ incomes are under pressure and borrowing is expensive. We expect this landscape to become easier over time, but investors should be prepared for some ups and downs.
- Advertising revenue is also a tough market in the current climate. We believe digital advertisers are more resilient than traditional marketers.
- When trying to understand what’s likely to move share prices, keep in mind the market always has a close eye on strategy, not just revenue and profit. So, you should too.
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Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.