Alphabet and Microsoft Lead Bear Market Earnings Season

Alphabet and Microsoft Lead Bear Market Earnings Season

(Bloomberg) — Investors are facing a breakthrough week for some of Wall Street’s most influential tech stocks in a historic year for the group marked by a dive into bearish territory.

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Superlatives came and went in the mad dash of 2022. Shares of Meta Platforms Inc. fell 61%, their biggest drop since the company went public a decade ago. Apple Inc., Alphabet Inc., Amazon.com Inc. and Microsoft Corp. are expected to see their biggest decline since the global financial crisis.

The Nasdaq 100 index rose 0.6% on Tuesday.

Now, these companies are expected to release their quarterly results this week with projections showing the biggest drop in profits in at least three years. The quintet of stocks together make up about 40% of the weight of the Nasdaq 100 index, which has lost $6 trillion in value this year due to the Federal Reserve’s oversized interest rate hikes and growing potential for a recession.

“They are key to sentiment around technology, no doubt,” said Neil Campling, analyst at Mirabaud Securities. “Investors are now focused on the bottom line and want evidence of cost cutting, disciplined spending and not chasing revenue growth at all costs.”

Here’s a look at the Big Tech stocks slated for release this week and what investors are watching.

Alphabet

Investors are concerned about the strength of the ad market in a weaker economy, a theme that was underscored by weak growth at Snap Inc. last week. However, analysts still expect Alphabet’s full-year revenue growth of around 12%, slightly faster than the S&P 500, with double-digit increases also expected for the next three years.

Any sign after Tuesday’s market close that those forecasts are overly optimistic could send the stock plummeting. Keybanc Capital Markets on Monday lowered its estimates for parent company Google and now expects revenue to increase by just 5% for the year.

Weakness in stocks arguably made Alphabet a bargain, as it trades at just 17 times estimated earnings, a discount to its 10-year average and the Nasdaq 100 as a whole.

Microsoft

The software giant, which also reports after Tuesday’s close, is trading at 23 times earnings, a slight premium to its average for the past decade.

While demand for its cloud and enterprise software products is expected to be sustainable even in a recession, the 9.4% quarterly revenue growth analysts expected would be its slowest pace since 2017.

“The big question mark is, what impact will Microsoft see from the slowing economy and weak PCs?” Wiley Angell, chief market strategist at Ziegler Capital Management. “However, given the overall stable earnings and valuation of the stock, I think now is a good time to assess it.”

Metaplatforms

After a stock plunge that wiped $579 billion off Meta’s value this year, some investors would like to hear Mark Zuckerberg announce during Wednesday’s earnings report that he’s cutting spending for the company’s push into the Metaverse. This expensive gamble has yet to generate significant revenue at a time when investors are focused on cutting costs.

Parent Facebook has been beleaguered by blocking user growth, competition from TikTok and an Apple privacy policy that has diminished its ability to target ads. Additionally, it faces the same weak advertising market that pressured Snap.

Full-year revenue is expected to fall 0.7%, making it the only company out of five expected to register a decline. It is also expected to be the first year of declining revenue in the company’s history. Meta shares are trading near their lowest level on record, although that was not enough to entice the bulls.

Amazon.co.uk

Amazon reports Thursday afternoon, and the report will be reviewed as an indicator across industries. The e-commerce business will highlight consumer strength, especially as the holiday shopping season approaches, while its Amazon Web Services cloud computing division provides insight into how IT spending is holding up .

Investors will likely focus on Amazon’s progress in cutting costs, given the recent preference for profitability over growth. Amazon is trading above 40 times estimated earnings, more than double the Nasdaq 100, though below its long-term average.

Amazon is JPMorgan Chase & Co.’s best idea among internet stocks, and it sees the valuation as attractive. While analyst Doug Anmuth sees some risks – including currency headwinds and slowing discretionary spending – he writes that it “becomes a cleaner story through 2022 as revenue growth picks up to again and increase operating profit margins through 2023″.

Apple

The iPhone maker was the relative winner in 2022, down 15%. Investors are drawn to it because its steady growth and strong balance sheet give it safe haven status.

However, this could leave the stock vulnerable when it reports on Thursday. Bloomberg News recently announced that it is scrapping plans to ramp up production of its new iPhones given demand trends. The stock also trades at 23 times forward earnings, above its long-term average and the broader market.

“Apple certainly doesn’t appear to be priced for a recession, and the multiple could be in question in the near term, given what we’re hearing about market weakness,” Angell said. “However, earnings stability should continue to translate into stock stability, while providing a higher floor for the multiple.”

Technical table of the day

Top Tech Stories

  • Apple has hiked prices for its music and TV+ services for the first time, citing rising licensing costs, a move that risks giving rivals an edge in a fiercely competitive streaming industry.

  • WhatsApp, the instant messaging service owned by Meta Platforms Inc., said it fixed an issue that was causing widespread outage, with tens of thousands of users reporting problems.

  • Amazon workers seeking to join a union at a company warehouse in Southern California have given up their bid to hold an election, a setback for the new Amazon Labor Union after it was defeated at a facility in New York last week.

  • The unsealed US charges claim that two Chinese intelligence agents tried to obstruct a criminal investigation into Huawei Technologies Co., and alleged that others were working on behalf of a ‘foreign power’ to try to get procure technology and recruit spies.

  • Jellysmack, backed by SoftBank Group Corp., which helps content creators become YouTube and TikTok stars, is launching a spending spree for growth in Asia after staff cuts this year.

–With the help of Subrat Patnaik.

(Updates when the market opens.)

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