Over the past two weeks, I provided highlights of the earnings of companies on the Malta Stock Exchange that published their interim financial statements.
While the regulatory obligation in Malta is for equity issuers to publish their financials on a semi-annual basis, the requirement across the larger international financial markets is for companies to publish their results on a quarterly basis.
The international financial media provides deep coverage of the earnings announcements by these companies and there is generally a lot of hype surrounding the publication of results of the very large multinationals that invariably always provide detailed guidance to financial analysts. This custom was somewhat dented at the start of the pandemic as various companies opted to reduce their forward guidance in view of the uncertainties brought about by the virus.
As such, in recent weeks, there was ample publicity given to the Q2 reporting season and it is, therefore, worth highlighting the key trends in the results of the largest technology companies in the US. The five largest technology companies ‒ Apple, Amazon, Alphabet, Microsoft and Facebook ‒ account for 22 per cent of the S&P 500 Index and, as such, the results and share price performance of these five companies play a large part in the overall trend of the S&P 500 and sentiment towards the technology sector.
Apple reported that during the third quarter of their financial year to June 30, overall revenues surged by 36 per cent to US$81.4 billion, beating the analyst consensus by a wide margin as iPhone sales jumped by 50 per cent to $39.57 billion. Although the US is still the group’s largest market accounting for 44 per cent of net sales (equivalent to over US$35.9 billion), the largest improvement during the last quarter was from China with a jump of 58 per cent in sales to $14.8 billion. Net profits during the last quarter jumped 93 per cent to $21.74 billion.
The company, however, warned that component shortages would hit sales of its iPhones and iPads during the fourth quarter of their financial year between July 1 and September 30, although it is still expecting a strong double-digit increase. Apple also indicated that revenue growth from its ‘services’ segment would slow from that reported in the last quarter when revenue rose by 32.9 per cent to US$17.5 billion.
Amazon’s Q2 results published on July 29 showed overall revenue of $113.1 billion, representing a growth of 24 per cent compared to the second quarter last year. Geographically, North America experienced a 21 per cent increase in net sales to US$67.6 billion (representing 59.7 per cent of total revenue) resulting in operating profits of US$3.1 billion (+47 per cent).
The ‘international’ segment reported sales of $30.7 billion (+27.2 per cent) and operating income of $362 billion. Meanwhile, the Amazon Web Services (AWS) segment generated sales of $14.8 billion (+37 per cent) and operating income of $4.2 billion (+25 per cent). Overall operating income increased to $7.7 billion in the past three months (with AWS accounting for almost 55 per cent of operating income) compared to $5.8 billion in Q2 2020.
Amazon’s overall profitability also improved by 48 per cent to $7.8 billion during the second quarter of 2021 − the second most profitable quarter ever experienced by Amazon. The company indicated that during the third quarter of their financial year, revenue is expected to be between $106 billion and $112 billion (10 to 16 per cent growth compared to the same quarter last year), with operating income anticipated to reach between $2.5 billion and $6 billion. Alphabet Inc, the parent company of Google, announced a better-than-expected 62 per cent jump in revenue to $61.88 billion during the second quarter ended June 30, 2021, as Google advertising revenue rose nearly 70 per cent to $50.44 billion and YouTube’s advertising revenue soared 84 per cent to $7 billion compared to the same quarter last year.
Google Cloud (a business line in competition against Amazon and Microsoft) also reported strong growth as revenue rose more than 50 per cent to $4.62 billion. Alphabet’s profitability rose more than two-and-a-half times to $18.52 billion with the operating profit margin rising to 31 per cent compared to 17 per cent in Q2 2020.
During the fourth quarter of their financial year between April and June 2021, Microsoft reported revenue growth of 21 per cent to $46.2 billion as sales from its cloud platform Azure jumped 46 per cent. Overall revenue from the ‘Productivity and Business Processes arm’, which includes the company’s Office software, jumped 25 per cent to $14.7 billion.
Investors need to invest with a long-term horizon and do their best not to panic when prices fall
Microsoft reported a 47 per cent jump in net profits during the past quarter to $16.5 billion. Although the company delivered better-than-expected quarterly profits and sales on the back of another strong performance from its ‘cloud’ business, the immediate share price reaction was negative as some commentators highlighted the possibility of a slowdown in the fast-growing segment of the company. Microsoft reported that its net cash position as at the end of the 2020/21 financial year amounted to $72.2 billion.
Facebook announced that its second quarter revenue rose by 56 per cent to $29.1 billion, reflecting a 56 per cent rise in advertising revenue to $28.6 billion and operating profit more than doubled to reach $12.4 billion. However, the company warned that during the third and fourth quarters of 2021, it expects “year-over-year total revenue growth rates to decelerate significantly” due to the strong growth rates experienced in the comparative period last year. It also reiterated further headwinds are expected relating to Apple software updates, which will affect targeted adverts. As of the end of June, Facebook had $64.1 billion in net cash compared to $62 billion at the start of the year.
Collectively, the combined revenues of the five Big Tech companies amounted to $332 billion during the past three months (representing a growth rate of more than 30 per cent) with profits rising by almost 90 per cent to $75 billion. The annualised revenue of circa $1.3 trillion would place these five companies at a level nearly the size of the Spanish economy – the fourth largest economy in the eurozone.
The combined market value of the Big Tech companies now exceeds $9 trillion and despite the extraordinary results of the past quarter, there are an increasing number of international financial journalists and analysts questioning whether the growth rates reported in recent reporting periods can be sustained in the near term. Apple, for instance, highlighted the chip shortages among one of the factors that will be leading to weakening growth rates.
Another obvious factor that all five companies would need to deal with is the tough comparative figures that the market would be using as a basis to measure the performance of these companies. Effectively, all these companies will face the difficulty of ‘the law of large numbers’.
To put this into perspective, when sales of a young company are say US$100,000 per annum, a 40 per cent growth in sales may be easy to achieve. However, when annual revenue reaches $400 billion as is the case with Amazon, generating additional revenue of $160 billion is pretty difficult to achieve.
In view of the strong share price performance of the Big Tech companies over the past 18 months, there may be increased volatility in the aftermath of earnings announcements as was seen by Amazon with a 7.6 per cent decline on the day following the publication of results.
Share prices remain impossible to predict in the short term. However, businesses producing goods and services bought by millions are likely to continue to reward long-term investors for the risk taken when investing.
As advocated many times in the past, investors need to invest with a long-term horizon and do their best not to panic when prices fall as was evident at the start of the COVID-19 pandemic in early 2020. Essentially, long-term investing is the most effective path for investors to build significant wealth.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned beforeits publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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