Opinion: The FAANMGs have been whittled down to the Fantastic Four
The anticipation for Big Tech’s second-quarter earnings was palpable.
With a wide range of indicators pointing to a slowing global economy, the highest inflation in four decades and a sharp rise in interest rates, there were plenty of reasons to expect earnings of technology be another data point of our fragile economic state – dare I say recession?
For some technology companies, it was a tough quarter. Social media companies Snap SNAP,
and Meta META,
come to mind. Chipmaker Intel INTC,
may be at its lowest point.
Others have done much better. IBMIBM,
kicked things off with relative force. MicrosoftMSFT,
and GOOG Alphabet,
missed estimates by a hair’s breadth but largely reassured investors about their results. Amazon significantly beat revenue numbers, and Apple AAPL,
leading figures at all levels.
It was a mixed bag of results that perhaps left as many questions as answers. But in short, the big wave of tech earnings this quarter made that clear. Based on a combination of the right products, the right markets and unfettered demand that far outweighs any global economic distress, some companies are too big to be bothered by the downturn.
The following four companies have the ingredients that will make them too big to fail, and therefore should remain long-term outperformers, even when tech trading is unpopular.
After the big downside surprise in the first quarter, Amazon showed discipline and strength. The business was properly sized for a post-pandemic cycle, but saw revenue rise and forecasts looked even better, especially after seeing the strength of July’s Prime Day event. Profits are still hampered by the Rivian RIVN,
investment. But the markets have moved past that, and the company even rolled out part of its Rivian fleet last month, pursuing enduring ambitions, which continue to impress. The company also mitigated any “cloud growth issues” that may have existed, as its Amazon Web Services business grew 33% and hit a clip of nearly $20 billion per quarter. Amazon was also buoyed by strong growth in its advertising business, with low double-digit growth but showing other signs of Amazon, as well as Alphabet finding its preference on Meta as advertisers pull back, but not of their most important platforms.
A misfire is a misfire, but Microsoft’s misfire at six cents a share was precisely made up of a combination of foreign currencies, China-related shutdowns, and the continued impact of Russia and Ukraine. Still creating $2.23 per share in EPS and growing double-digit from last year’s record results, Microsoft has exposure to both businesses and consumers, and its results indicate the company is more than confident to weather any impending economic storm. Azure’s 40% growth has kept Microsoft as the fastest growing public cloud company, and like AWS, it was only slightly below its past quarters. The company also saw robust growth in its cloud ERP business, search and advertising, and even Surface business, which was unaffected by rapidly deteriorating demand in the PC space.
After Snap failed, the market was ready to throw the baby out with the bathwater. While Alphabet, like Microsoft, also missed estimates, it was a near miss that didn’t bother investors as the stock rebounded after earnings jumped the wire – in largely because Alphabet’s bread-and-butter ad business has shown strength. The easing in ad spend didn’t seem to match Google Advertising, as the company grew double-digit year-over-year and showed much greater resilience than its peers, especially Meta. What immediately became apparent was that Google and YouTube advertising are better at battling macro trends and competition from Tik Tok, which is proving to be formidable. Google’s cloud business has also kept pace with AWS and Azure, with growth exceeding 30% and further proof that cloud as an operating model has economic tailwinds that will remain strong over turbulent markets.
A new iPhone is always a good thing for Apple. And Taiwan Semi’s TSM,
the earnings comments should have been enough to indicate that Apple would do just fine. Weaker iPad and Mac numbers align with a broader decline in the consumer and PC market. However, even with the alarm bells being raised by Apple due to China’s continued shutdowns, Apple, once again, delivered on its promise. With margins beating expectations and services revenue now reaching nearly $20 billion this quarter, Apple is also showing that its strength isn’t just in its devices. The service portfolio, along with its growing content business, is working. And the advice given by CEO Tim Cook was ‘pedal to the metal’ in so many words – which should have given investors something to smile about as we head into the next quarter.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advice or consultation to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any stake in the companies mentioned. Follow him on Twitter@danielnewmanUV.