- Tech heavy Nasdaq down over 10% in the last month as inflation bites
- Amazon shares fall 8.1% in after-hours trading
- Apple results more positive, but market reaction somewhat muted
The Nasdaq has seesawed its way through earnings season, ultimately ending 10% down in the last month. Huge insecurities around the long-term attractions of growth stocks in a high inflationary environment have sent jitters through global markets. Long seen as the untouchables of the investing universe, big tech has had a rude awakening – there have been times in recent weeks when some big tech names have come within a whisker of being considered truly value. Belt-tightening has caused the investment cases of some huge names to be called into question, with sticky subscription-based revenues the finance world loves so much, not proving as reliable as once thought. The spate of volatility is unlikely over for growth names, but for those with a long-term investing horizon there are some diamonds among this rough.
With Apple and Amazon the latest in the spotlight, it has been a very big finish for the end of earnings season, and for very different reasons.
Amazon – Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown:
“Amazon is still a titan, no one can deny that. $116bn of quarterly sales takes a mighty beast. Sadly though, the market isn’t asleep to the fact that Amazon is suffering badly at the hands of economies of scale. The group had to double its capacity to meet demand when the pandemic hit, and as of yet, revenues aren’t keeping pace to keep margins up. The focus now is on building scale so that each extra package off the distribution line can contribute meaningfully to group profits. There is no easy fix here. The plan is the right one, but the speed at which margin accretion comes through is a different question entirely.
With inflation hitting household budgets around the world, spontaneous Amazon purchases are likely to be reined in. With a lot of what’s on the website discretionary items, this puts Amazon’s retail operation in the eye of the storm.
Thankfully there’s a very handy, and lucrative side kick, in the form of Amazon Web Services. This has once again propped up an ailing income statement, and should be able to continue doing so while Amazon’s core business gets itself in order. Further pressure on the share price is likely in the coming months though, as there’s no getting away from wider macro-economic pressures, and the sound of purse strings drawing to a swift close.”
Apple – Laura Hoy, Equity Analyst at Hargreaves Lansdown:
“Inflation’s taken a bite out of just about everyone except Apple. While not technically in the luxury goods category, Apple’s brand cache is keeping the group riding high despite rising costs.
iPhone loyalists continued to upgrade despite rising budgetary demands—and that’s the thing about Apple that the market loves. Once someone’s entered the ecosystem, they’re in it for the long-run. That’s evident in the group’s ability to continue peddling $1,500 phones, despite a deteriorating macroeconomic backdrop.
iPhones have long been Apple’s bread and butter, and it’s good to see they’re propping up revenue, but the service arm is where the future lies, and that’s faring well too. Services offer much higher margins than products—the cost to add a new music subscriber is far less than it would be to build a new computer. It’s been somewhat of a side-hustle for Apple over the past few years, but with revenue growth approaching 20%, it’s appears to be coming into its own. At this rate, it will make up about a quarter of overall revenue in just over one year.
So confident is The Fruit in its ability to churn out growth while its peers struggle, that it’s throwing another $90bn into share repurchases. We can’t blame management for thinking now might be a good time to snap up shares, Apple stock’s been caught up in wider tech malaise, so the valuation has come down considerably from 2021 highs.”
Amazon and Apple financial summaries:
Amazon reported first quarter net sales of $116.4bn, roughly in line with expectations of $116.3bn. That represented a 9% increase once the effect of exchange rates is stripped out. Growth reflected positive performance in North America and Amazon Web Services, while the International business declined.
Increased investment meant operating profit fell 58.6% to $3.7bn, much lower than expectations of $5.3bn. All profit growth was driven by the higher-margin Amazon Web Services business.
North American sales rose 8% to $69.2bn, but there was an operating loss of $1.6bn, compared to profit of $3.5bn last year. International reported net sales of $28.8bn, flat on last year, and operating profits swung from $1.3bn to negative $1.3bn. Amazon Web Services (AWS) had a more positive quarter with sales up 37% to $18.4bn, while operating profit rose faster – up 53% to $6.5bn.
The group also saw a 25% rise in Advertising services revenue to $7.9bn.
Total operating costs rose 13.2%, reaching $112.8bn. This included an almost $4bn increase in fulfilment costs.
There was a free cash outflow of $18.6bn for the trailing twelve month period, compared to an inflow of $26.4bn at the same point last year. The group had net cash of $18.8bn, as at the end of March.
Next quarter, Amazon expects net sales of $116bn - $121bn, and operating profit to be between a $1bn loss and positive $3bn.
Apple’s total net sales rose 8.6% to $97.3bn, reflecting growth across both Products and Services. This was better than the market expected. Operating expenses rose 18.9% to $12.6bn, but despite this, operating profit rose to $30bn from $27.5bn.
There has been a good response to new products, according to management. This fed into a 5.5% increase in iPhone sales to $50.6bn. Mac sales grew 14.6% to $10.4bn, although iPad sales fell 2.0% to $7.6bn. Wearables, Home and Accessories rose by just under $1bn to $8.8bn.
Services revenue rose just under $3bn to $19.8bn.
There was growth in every geographic region, except the Rest of Asia Pacific. Apple’s biggest market, the Americas, saw net sales of $40.9bn, up 19.2%, while Europe was more tepid, rising 4.6% to $23.3bn. Greater China revenues rose just over $615m to $18.3bn. Japanese performance was broadly flat.
Apple had net debt of $61.5bn at the end of March, and free cash flow of $69.8bn.
There was a 5% increase in the dividend, with a payment of $0.23 per share announced.
Apple shares rose 1.5% in after-hours trading.