Facebook, Amazon and Apple – 3 takeaways from the latest US tech results

US tech earnings season was a rollercoaster of emotions. From the largest one-day drop in history to record-setting gains, volatility springs to mind.

The earnings themselves weren’t the only thing moving the dial though. A backdrop of economic uncertainty, rapid inflation and central bank rate increases all loomed to create a perfect storm of unpredictable results and market reactions.

Now the dust has settled, we’ve taken a closer look at the biggest surprises from the last few weeks and what they could mean for investors.

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Facebook’s fall from grace

Perhaps the biggest shock came from Facebook parent Meta. The group’s disappointing fourth quarter results ended up wiping off more than $200bn off the social media giant’s market cap.

Meta Share Price (USD)

Past performance isn’t a guide to the future. Source: Refinitiv, 07/02/22.

A tech sell-off had already been snowballing in the lead up to the results as interest rates rose. Rising interest rates make future profits worth less in today’s money. That means stocks boasting a high price to earnings (PE) ratio can start to look overvalued.

Meta gave them more of a shove with a 1% decline in fourth quarter operating profits and a bleak outlook for the current quarter. Add to that a slowdown in advertising spend and a declining userbase at its flagship social media platform, and you have the makings for some very unhappy shareholders.

There are a few things that stood out from this report that are worth bearing in mind though.

The first, and perhaps most important, was the fact that overall users are continuing to rise. This means that while Facebook itself might be starting to show its age, people are still flocking to Instagram and WhatsApp. This small silver lining is hard to see in the group’s financials though. That’s because WhatsApp hasn’t been fully monetized and Instagram’s most popular feature – videos – serves users fewer advertisements, so it generates less money.

Meta’s growing number of users might not be quite as impressive as it once was, so revenue per user growth is essential. In the current climate, this means making existing platforms more advertiser-friendly. Meta needs to optimise video content. We’d also like to see a concrete monetization strategy for WhatsApp and Messenger – still largely untapped revenue streams.

The selloff means Meta’s now trading near its lowest ever valuation at a PE of 18. The fourth quarter results came with a lot of problems, but few solutions and the decline reflects uncertainty about the road ahead.

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Amazon’s into advertising

Another big moment from US tech earnings came from Amazon, whose fourth quarter results were lacklustre at best.

However, the market had an astonishingly positive reaction, partly reflecting investors’ enthusiasm over Amazon’s strides into the advertising arena. The group broke out its advertising revenue for the first time this quarter, revealing a $9.7bn business that’s grown 33% over the past year.

Amazon Fourth Quarter Revenue 2021 (USD)

Source: Amazon company accounts.

That’s a drop in the bucket for Amazon but represents an exciting growth lever. Amazon’s trove of customer purchase data is a valuable targeting tool for advertisers. Not to mention the seamless transition between seeing an ad and buying the product Amazon’s platform can offer.

But we’re left wondering whether this ad-fuelled optimism was overshadowing Amazon’s core retail business – which offered only tepid results. Sales rose, though slower than expected, and rising costs cut operating profits nearly in half. Amazon Web Services, the group’s cloud business, was responsible for all of the group’s operating profits.

To combat rising costs and wage bills, Amazon’s increasing Prime membership costs in the US. This is a bold move considering consumers are being hit hard by inflationary pressure. The cost of living has risen substantially and a greater outlay on must-haves means a pullback on nice-to-haves. Amazon’s about to find out more about which category its services fall under.

Amazon’s a force to be reckoned with. Its sprawling network and diverse income streams aren’t lost on us. But the fourth quarter results left us feeling lukewarm. Rocket-fuelled growth is harder to come by for a business of Amazon’s size. Although its valuation has come down somewhat over the past two years, shares change hands for 60.5 times forecast earnings, so expectations are high.

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Apple’s changing its core

Apple’s made a name for itself as the purveyor of sleek electronics. The group’s managed to climb to the top of the class in just about every category, from iPods and iPads to iPhones and Apple Watches. The market’s long been focused on Apple’s dominance in hardware – specifically iPhones, where over half of revenue comes from. That’s begged the question, what’s next? What apple-embossed gadget will be next to hit the shelves?

But Apple’s most recent results confirmed that it might not be a physical thing. The group’s small but mighty service arm caught our attention with margins upwards of 70% and 24% annual sales growth. This part of the business houses everything from its newly launched fitness platform to fees from the app store. It’s a small, but fast-growing part of the business that has a lot of potential to grow.

Apple first quarter 2022 revenue breakdown (USD)

Source: Apple company accounts.

That’s not to say the hardware business the group’s built its reputation on isn’t impressive. Despite strong supply-chain headwinds, the group still managed to boost margins. A decline in disposable incomes did little to quash excitement for the latest round of device upgrades, underscoring one of Apple’s biggest strengths – its ecosystem. It adds weight to the argument to buy another Apple device and once inside, it becomes harder to switch.

As prices continue to rise, this theory could be put to the test – with energy costs about to double, it’s harder to justify a £1000+ phone. But if demand for the latest generation of products is anything to go by, the Apple army haven’t reached their breaking point yet.

For now the hardware business has to be the focus, and while Apple’s done an excellent job navigating challenging waters so far, there could be more obstacles ahead.

We’re mindful that 2022 will be a tough year for even the shiniest retailers as cost inflation and supply chain issues continue to nip at their heels. The group’s PE is some way above the long-term average, leaving very little room for error. But with its impressive cash generation and a loyal band of followers, we think a more service-oriented Apple has a long growth runway ahead.

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Please note, a connected party of the author holds shares in Apple.

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.

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