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US tech earnings takeaways – a new era for investors?

Here are the 3 biggest takeaways from the tech earnings season, with a particular focus on the FAANGs.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This earnings season was a rollercoaster of emotions for the so-called FAANGs, Facebook parent Meta, Amazon, Apple, Netflix and Google parent Alphabet. Unfortunately, the ride came with more valleys than peaks. It’s led many to reconsider whether the once-loved bundle of US tech stocks are still worth considering in a post-pandemic world.

The spate of erratic results suggested we’re entering a new era where assumptions about value and future growth no longer hold true. As some of the tech titans of the past prepare to do battle in an environment punctuated with inflation and a more conscious consumer, it appears the chinks in their armour might not be quite as minor as once seemed.

With that in mind, here are what we think are the three biggest takeaways from the tech earnings season.

For a more in-depth look at how each of these companies and over 100 more perform each quarter, sign up to our Share Research.

Investing in individual companies isn’t right for everyone – it’s higher risk than investing in funds as your investment is dependent on the fate of that company. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

This article isn’t personal advice, if you’re not sure if an investment’s right for you, seek advice. All investments and any income they produce can fall as well as rise in value, so you could make a loss.

Investors are more discerning about valuation

At one point it seemed there was no such thing as ‘overvalued’ for the US tech set. Market caps marched passed the $1trn benchmark and even then terms like ‘unlimited growth’ and ‘more upside’ were thrown around. But it’s going to take a lot more to impress investors these days.

When interest rates rise, it makes money received in the future less valuable. When you buy shares, you’re essentially lending a company money under the assumption you’ll get back more in the future. The higher interest rates rise, the less that ‘IOU’ is worth.

Bank of England increases interest rates to 1% – how to make more of your savings

The result is that all things remaining constant, investors are willing to pay less for the FAANGs. But all things didn’t remain constant. As rate rise fears built (and were eventually confirmed), the FAANGs updated us on their performance. Anything less than an impressive beat was met with a sell-off.

This was the case for Alphabet, whose earnings didn’t measure up to the market’s standards despite posting double-digit growth on the top and bottom lines.

However, investors were concerned that YouTube wasn’t performing as well as expected, a potential sign that advertising revenue is getting harder to come by.

Alphabet makes most of its money this way, and YouTube’s been a standout performer so far. But the video service might have hit its peak during the pandemic. Ad revenue for this part of the business rose 25% in the fourth quarter, but this time around it was up only 14%.

YouTube ad revenue ($ millions)

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: company accounts 2020-2022.

Alphabet, with its monopoly in online search and impressive cash hoard, is still in a strong position. But shares currently change hands for 21 times expected earnings. Investors are beginning to question whether that’s a fair deal in the current environment.

Apple was another victim of this phenomenon. It was difficult to find fault with the group’s results. Revenue rose 9% and operating profits increased at a similar rate to $30bn. Management also upped shareholder returns with a 5% bump to the dividend and an expanded buyback programme.

Despite this, shares fell 2.5%. In fact, Apple’s valuation has come down significantly since its pandemic highs. Apple’s products aren’t exactly cheap, and they’re exposed to ongoing supply chain and inflationary headwinds.

The pull of its gadgets is strong. However, markets are worried it might not be strong enough to convince people to open their wallets with inflation creeping into the double-digits in several countries.

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TikTok’s coming for… everyone

Viral video app TikTok has made waves among coveted younger users and the pull of its algorithm is unparalleled.

That’s part of the reason Meta’s has seen user growth starting to taper. With 3.6bn people logging in every month, though, that’s somewhat to be expected. Still it means the group has to get creative with new ways to get eyeballs on the screen.

Advertisers pay Meta’s bills and to keep them happy the group has to offer time and space in front of their ideal consumers. At one point, simply being the most popular social media platform was enough. But with competition on the rise and user growth plateauing, Meta has to pedal harder to keep up.

Meta daily active users (billions)

Scroll across to see the full chart.

Source: Meta fourth quarter earnings report.

That means getting creative with how people are using the service, and effectively monetising those new features. Having a captive audience is virtually useless unless you can advertise to them.

It makes sense that Meta investors have a close eye on new competitors, but it’s telling that several others – including both Alphabet and Netflix – found themselves under fire.

Number of app downloads in 2021 (millions)

Scroll across to see the full chart.

Source: Apptopia via Forbes.

Alphabet’s YouTube service has a close link with TikTok since they both offer video sharing. It’s part of the reason investors are nervous about YouTube’s slowing growth.

More surprising was Netflix, whose service has become synonymous with hours-long binge-watching sessions. But 30-second clips on TikTok add up and the result is a battle for customers’ attention. Netflix used to compete against other streaming services and traditional cable. But the playing field is widening.

This was evident in Netflix’s unexpected 200,000 decline in new signups (more on that later).

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The trouble with subscribers

Subscription-based revenues have long been favoured by the market. They’re traditionally predictable and ‘sticky’. It’s something we’re seeing Apple work to build out through its Services business.

For now Services makes up just a small part of the overall business, but it’s growing at a good clip. If the current growth rate is sustained, the division will make up a quarter of total revenue in just over a year.

This takes some of the focus off iPhone sales, traditionally the group’s bread and butter. Making, selling and shipping an iPhone is expensive. By contrast, service subscribers cost almost nothing to add, and the majority of their reoccurring payments drop straight through to the bottom line.

But just because subscription services tend to offer higher margins doesn’t mean they’re bulletproof. At some point the new subscribers coming in will start to dwindle, and the company will have to look elsewhere for growth.

That’s a problem Netflix is currently facing. Revenue grew at 9.8% rather than the double-digits investors have become accustomed to. That’s thanks to dwindling new signup numbers.

Paid streaming memberships (millions)

Scroll across to see the full chart.

Source: Netflix first quarter results.

What’s more troubling is it’s unclear exactly how Netflix will fight back. The group’s exploring ways to clamp down on membership-sharing, but the bigger issue is whether people will pay for the service with so many choices out there. The group’s already somewhat on the back foot against competitors like Disney, who have massive backlogs of content to lean on.

But Netflix is starting from a much lower base, spending $17bn a year to create hit shows from scratch to keep people renewing their memberships. That looks even more demanding when you throw competitors like TikTok, which relies on users making content for free, into the mix. An ad-supported Netflix membership could be the answer, but the idea hasn’t been tested.

The bottom line

This earnings season has come with some pertinent reminders – don’t get complacent.

While we always suggest taking a long-term view, it pays to review your holdings regularly and make sure they still line up with your investment objectives.

Some of the US’ tech greats appear to be facing genuine, and perhaps lengthy challenges. While others have been affected by their peers.

It’s sensible to make sure one investment hasn’t grown to take over the majority of your portfolio, so rebalancing is key.

As ever, holding a diversified mix of investments is key.

Learn more about how to diversify

A connected party of the author holds shares in Apple.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. 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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    Important notes

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