US earnings season roundup – key investor takeaways

There’s been a lot to digest from the recent US earnings season, with mega cap stocks coming under more pressure than we’ve seen for some time. Here’s what stood out for us.

This article isn’t personal advice, if you’re not sure if an investment’s right for you, seek advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.

Investing in individual companies isn't right for everyone. That's because it's higher risk, your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Amazon – demand comes under pressure as costs rise

Matt Britzman, Equity Analyst

Third quarter results for Amazon disappointed. The biggest worry for investors came from the guidance for the fourth quarter, traditionally the most important period of the year for e-commerce. Revenue in the fourth quarter’s expected to come in the range of $140-$148bn, lower than the $155bn markets were hoping for.

There’s no escaping it, the core e-commerce business is under pressure. Booming demand seen over the pandemic continues to cool. Consumers facing higher costs also have decisions to make about how much they can afford to spend over the upcoming Christmas period.

The challenges run a little deeper. Amazon went too big too soon on its expansion plans and it’s had to put the brakes on, and then some, to try and get costs back under control. Operating costs were up close to 18% in the last quarter. So those cost cutting actions haven’t made their way through as fast as we’d like to see, weighing heavily on the bottom line.

Then there’s AWS, the darling child of Amazon and the only business segment delivering profit at the minute. Its arguably the only reason Amazon’s been able to hold on to its high valuation, still trading at 65 times earnings despite the shares being down over 40% this year.

Despite seeing revenue growth of 28%, that was a slowdown on the 30%+ we’re used to seeing. Weakness in this area suggests enterprises might be considering where to allocate capital and upgrading cloud tech given such an uncertain backdrop could be something that gets kicked down the road.

Ultimately, weakness in a powerhouse like Amazon grabs some serious attention. How demand holds up over the coming Christmas period will be as important as ever. For Amazon specifically, getting costs back on track is a key focus.

VIEW THE LATEST AMAZON SHARE PRICE AND HOW TO DEAL

Sign up for updates on Amazon

Apple – a revenue beat isn’t enough to stop market jitters about what’s to come

Sophie Lund-Yates, Lead Equity Analyst

Apple’s fourth quarter revenue of $90.1bn did better than analysts were hoping for. But the reaction from the market has been muted. Part of this is because ‘good’ news isn’t good enough in the current higher-risk environment – investors need more than usual to get excited. The biggest thing holding Apple back is that its iPhone and Services sales were weaker than hoped for.

Hardware, especially iPhones, is still the most important aspect of Apple. Its model relies on selling as much hardware as possible, which helps entice people into its web of lucrative Service add-ons. Things like Apple Music and the App Store. Wearables (think Apple Watch) and Accessories did well in the quarter, but as these only make up a small part of Apple’s pie for now, it wasn’t enough to boost the stock’s sentiment.

Disappointing iPhone sales warn quite starkly of the effects of inflation. Apple has one of the best brands on the planet, so weakness is telling. Consumer confidence is at significant lows. Asking people to part with hundreds, or even thousands, of dollars for a new phone is proving to be a very tall order.

As you might imagine there were plenty of things to consider in the results, but the key stand out is that Apple is going to need to peddle hard to satisfy expectations next quarter. The crucial festive trading season is going to be more important than it’s been in a long while this year, and I’m heading into the January results with some trepidation.

VIEW THE LATEST APPLE SHARE PRICE AND HOW TO DEAL

SIGN UP FOR UPDATES ON APPLE

Meta – more challenges than feared

Sophie Lund-Yates, Lead Equity Analyst

I’m the first to admit I had some reservations heading into Meta’s results. Snapchat’s parent company released results before the Facebook owner, warning of the effects of weakening advertising demand. That was always likely to ring true for other names in the sector. But the scale of Meta’s valuation downgrade since its results has been a shock.

Third quarter revenue fell 4% to $27.7bn, with the bulk of that attributable to lower advertising revenue. The stark point was that within that, the average price per-ad was 18% lower. This suggests that convincing marketing teams to spend on Meta’s family of platforms, including Instagram, is a very difficult task in the current economic environment. There are concerns this isn’t an economy-specific issue, and that Facebook’s potency is waning.

That brings us onto the other mammoth change. Meta is planning to spend $96 - $101bn in the next financial year. A chunk of this relates to Meta’s augmented and virtual reality grand plans. The plans for which are vague at best. The proportion of the budget going on the unproven ‘reality labs’ has made the market very nervous.

Ultimately, Meta’s results were disappointing. They highlighted that there are significant wider challenges in the advertising revenue space, but that Meta-specific question marks are getting bigger, not smaller. Of course, if Meta comes good on its plans, there could be a rapid reversal of recent trends.

VIEW THE LATEST META SHARE PRICE AND HOW TO DEAL

SIGN UP FOR UPDATES ON META

What does this all mean?

It's becoming clear that big tech names, which markets have clung to in times of weakness in the past, are starting to lose their "safer" allure.

With higher interest rates, companies trading on high earnings multiples are having to work even harder to justify their valuations. It’s in tougher times that questions really start to be raised, investors dig into every penny or cent being spent to see exactly what they can expect in return. Ultimately, some names just aren’t doing enough to keep investors happy.

A few of the big names, Meta and Amazon being prime examples, are so deeply entrenched into the lives of millions of people that wider economic downturns are hard to navigate. If an extended recession comes, expect to see those reliant on consumer demand and advertising suffer – early signs of which are already here.

Those with huge brand power, like Apple, could be set up to fair better in stormy seas. One thing’s for sure, the Christmas period looks set to be one of the most important in quite some time. Traditionally a time when consumers get out and splash the cash, names like Amazon and Apple will be looking for demand to hold up better than expected if they want to surprise markets on the upside.

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.

Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

Share insight: our weekly email

Sign up to receive weekly shares content from HL.