The Week in Review
David Colasurdo, CFA
Investment Advisor and Portfolio Manager at BMO Nesbitt Burns
Way Down We Go ?
How the mighty have fallen! The high flying FAANMG are no longer the darlings of the market after going through earnings season. Facebook, Apple, Amazon, Netflix, Microsoft and Google dominated the stock market for the better part of the last decade. At their peak, they represented almost 10 trillion dollars in market cap. Today? That figure is closer to 8 trillion. The question on investors’ minds is what comes next for these companies?
Proceeding in order, we begin with the company formerly known as Facebook, currently identifying as Meta Platforms. The world’s largest social media company actually performed well post earnings, rising 9% after beating very conservative estimates. While the Facebook platform itself has matured, the company is still finding success through Instagram and the addition of the Reels feature which allows them to compete with today’s hottest social media story, TikTok. While the growth of the company has considerably slowed down, it has placed large bets in the metaverse and could find itself becoming a higher growth opportunity in the future, although that future is far from guaranteed.
These days, Apple is seen more like a safe haven than an innovator or grower; it has performed quite admirably in a time when investors are fleeing tech for defensive names. It is worth noting that before the pandemic, Apple had already begun to transition to a slower growth phase as profits only rose 4.5% per year between 2017 and 2020. 2021 was a whole other story however, as the company posted impressive 65% growth and brought their annual profits close to $100 billion. While the company’s recent product launches are dwarfed by the successes of the IPhone, their cash pile hovers at close to $200 billion and gives them plenty of ammunition to invest into or buyout the next best thing.
Amazon, the world’s largest retailer, is down 9% post earnings after disappointing investors with a guidance below consensus. Having exploded in growth throughout the pandemic, it?seemed inevitable that there would have to be some slowdown on its growth rate on a relative basis, however, based on today’s reaction, not all investors understood this. Amazon is currently trading at 38 times the 2023 estimate versus 38 times for Costco. It is easy to forget that Amazon also hosts the world’s largest cloud business (AWS) that grew 37% last quarter, is approaching a $75 billion run rate and runs at very healthy operating margins of 35%. Costco, on the other hand, has no fast growing cloud business and although it may be slightly more defensive as a traditional retailer, the fact that the two companies are priced similarly when looking at earnings over the next two years severely discounts all the additional sources of revenue that Amazon has.
Netflix is the weakest of the bunch. Having finally succumbed to the competition narrative, Netflix lost users in the 1st quarter and is forecasting to lose more in the quarter ahead. The shocking reaction to earnings (down more than 45%) is a combination of their outlook and the current (unforgiving) market environment, nonetheless, the company will have its challenges when it comes to convincing investors to buy back into their story.
Microsoft was the star of the group. The company beat expectations, raised guidance and has its hands in multiple growth initiatives. Azure, the second largest cloud business in the world, grew 49% last quarter which is actually faster than in the previous quarter. Their LinkedIn acquisition also continues to pay dividends, having grown 35% in the quarter. While the slowdown in gaming was not ideal, it is important to note that they are looking to complete their $68 billion takeover of Activision Blizzard (a gaming company) throughout fiscal 2023.
Google’s results were not terrible but a slowdown in Youtube’s growth rate (14%) has some investors worried about the competition brought on by TikTok.?After growing their earnings per share by 91% in 2021, a slowdown is forecasted for 2022 before resuming profit growth at around 15% per year. Search revenue for the quarter was close to $40 billion and their quarterly operating income at $20 billion; this is still a company that produces massive figures and has a track record that earns them my patience.
领英推荐
Some investors may be asking themselves, is oil the new tech? No, Apple and?Microsoft could buy America’s largest oil company Exxon using just their combined cash. I want to reassure everyone. We have increased our oil exposure as it is appropriate to do so, however, this is not the dotcom bubble bursting all over again. The tech companies are immensely profitable and produce massive cashflows. At the risk of sounding like a broken record, I repeat; the macroeconomic uncertainty prompted by the war in Ukraine, the higher than expected inflation and interest rate uncertainty pushes investors to look at things from a short term perspective. This environment is like driving in a fog where you can’t see more than a few meters ahead.?You have no choice but to slow down and drive cautiously and eventually, the fog goes away, the road ahead becomes more visible and as you start to drive a little faster, you breathe a sigh of relief. We’re all driving in the fog, all we can do is keep going and we’ll get through it eventually.
Healthy Distraction?
One of my good friends is leaving the country. After having moved here from Spain 8 years ago, he and his girlfriend are moving back to Europe. What I find most admirable is that they do not have a set living place yet, they will stay with family until they find jobs in one of their targeted cities. While we cannot all afford the same level of uncertainty, I think it’s important to remove ourselves from our comfort zone at times, in order to grow and learn more about ourselves and our world. Don’t be afraid to try something new at the restaurant; maybe that strange looking meat is delicious or maybe that vegan burger is better than you think. Understanding that change is unavoidable and putting ourselves in these situations by choice may help us cope better when all the inevitable changes we do not necessarily ask for roll around. In the meantime, I will miss my Fratello but look forward to watching some Champions League games together in the future, especially when Milan plays Madrid.
To my father, who turned 60 this week, happy birthday once again! You introduced me to the markets and know everything about everything. I could not ask for a better example.?
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