Chief Investment Officer | Johnson Financial Group
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.
6 minute read time
Five stocks make up over 22% of the S&P 500 stock index. These five — Microsoft, Apple, Google, Facebook and Amazon— all reported their earnings this week.
These companies have been bellwethers leading the stock market higher as the pandemic has moved on. More recently, leadership in the stock market has moved back and forth between these stocks and those that will benefit most from the economic recovery, including stocks in the financial, industrial and services sectors.
Now, earnings news provides new insight into what these five companies have experienced and their view on the way forward.
The company’s revenue grew 19% year-over-year to $41.7 billion for the first quarter of 2021, while earnings rose 45% to $2.03 per share. (Of course, we know that year-over-year comparisons will be outsized due to the low level of activity during the early days of the pandemic in 2020.)
The stock declined on this great news, a telling note that these technology companies have, over the last year, been priced based on expectations of good news. That’s a consistent theme across all five this week.
Microsoft chairmain Satya Nadella noted with the earnings report: “Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning.”
Microsoft saw 46% growth in its cloud computing business, one that has certainly been a big part of the company’s rise in recent years. Some analysts noted that the business could easily double in size over the next several years. The cloud business for Microsoft—as well as, for Google and Amazon— will continue to grow at a rapid pace as more companies recognize the benefits.
The stock is down about 1% this week, indicating the market was expecting these great earnings results—not that anything is “wrong” with the outlook.
Perhaps one of the most impressive things about these five stocks’ earnings is that some are among the largest companies in the world and still able to put up growth numbers that impress. Apple’s market capitalization is $2.24 trillion, one of few companies in the world in the category of $1 trillion- plus market capitalization.
Revenue growth was 54%. Earnings though were $1.40 per share more than 40% above the consensus estimate! The growth rate for devices sold was between 65% and 79% for iPhones, Macs and iPads. Growth in China was also almost 88%. Apple also noted that the growing services business was twice as profitable as the product business.
Of note, Apple provided less guidance about the upcoming quarter’s performance and stated that it is battling a shortage of microchips for products. That’s also something we’ve heard from the auto industry and this week from Caterpillar. Supply chain constraints like those in the chip market are likely to have an inflationary impact on prices and could slow growth rates through the next two quarters.
Notably, the stock price hasn’t moved much this week despite the good news.
Alphabet, the parent company for Google, also reported earnings this week. Revenue was up over 34% to $55.3 billion in the first quarter. Of that, $44.7 billion was advertising revenue, a key driver for Google’s business. The company owns YouTube and noted that it earned over $6 billion in ad revenue from that platform alone. According to a Pew report, the platform saw an increase in usage from 73% to 81% of U.S. adults in the last two years, benefitting from people staying home during the pandemic. As people continue to move away from cable toward online streaming content from their favorite YouTube channels, this growth is likely to continue.
A $7 billion investment in office space across 19 states indicates that Google believes people work better when officed together. The company said that while a hybrid environment will be key to its future, it “will continue to need space.”
The stock is up only 4% this week despite the good news.
Another company that benefits mostly from advertising revenue, Facebook indicated that its revenue grew by 48% during the first quarter versus last year as a result of advertising prices up 30% and the number of ads shown up 12%.
Facebook did indicate that it expects revenue growth to decelerate through the remainder of the year. This is a signal we’ll likely hear from many companies as they note that this outsized performance is a result of the pandemic’s economic effect - coming to an end.
Facebook was perhaps one of the few tech companies to acknowledge the regulatory issues it faces when announcing earnings. It benefits from its ability to target ads to individuals based on their online footprint. Regulators are interested in making this more difficult, and a recent change by Apple to its operating system for the iPhone will allow users to restrict this kind of tracking, making Facebook’s ad revenue more difficult to grow.
The stock is up almost 9% this week.
Amazon is less reliant on advertising revenue than Alphabet or Facebook. It has a burgeoning cloud business that is driving profitability and remains the largest retailer on the planet. Amazon’s earnings during the first quarter were three times the level of a year ago:. $15.79 per share vs $5.01. U.S. sales topped $100 billion for the first quarter alone! That’s half the annual gross domestic product of Greece.
Many will be looking for Amazon to see a decline in revenues and earnings as the economy reopens and people spend more time on vacation and outside. However, its CFO noted in the earnings release report: “[W]e believe a combination of stimulus money, learned e-commerce behaviors and advertising strength should more than offset the expected impact of reopening.”
The stock is up about 5% this week.
Despite their amazing financial performance, none of these stocks moved much this week. That may be because they are all up so much from the depths of the pandemic and investors have been using them as a safe haven during a period of high uncertainty.
Still, in every case, they have surprised to the upside and shown that they can continue to grow their businesses at an accelerated pace. We are really at the beginning of the next wave of technological innovation, and all of these companies are at the forefront. There’s no question that cloud computing, entertainment and consumption will be shaped by these leaders going forward.
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