We’re on the back nine of the Q4 earnings season, which means while the overall picture of corporate performance at the end of 2018 is still coming into view, we have enough data to make some clear takeaways.
Due to its position as the market leader, earnings from the “big five” companies—Alphabet, Amazon, Apple, Facebook, and Microsoft—can have an outsized influence on investor sentiment. Collectively, those companies make up five of the top six most valuable companies in the world, and they account for over $3.5 trillion in market cap.
All that being said, let’s take a look at the biggest takeaways from what these companies had to say in their most recent reports.
On the surface, Alphabet’s fourth-quarter report seemed pretty positive, as the company handily exceeded analyst expectations for both earnings per share ($12.77 vs. $10.86) and revenue ($39.27 billion vs. $38.98 billion). They also announced the authorization of a $12.5 billion share buyback.
But those initial positive headlines were somewhat dampened on the conference call with analysts. In particular, analysts expressed concern about gross margins, which fell to 21 percent in the quarter from 23 percent the year prior, and capital expenditures, as the company spent over $1 billion more than what was anticipated.
Overall, the report seems to have been met with muted enthusiasm. Bank of America’s Justin Post seemed to sum up the sentiment best in his note to clients, calling it “a somewhat frustrating (quarter) for a business seemingly on a good trajectory.” Post, along with analysts from Morgan Stanley, Wells Fargo, and Raymond James all maintained their Outperform ratings and current price targets.
Amazon’s report told a very similar story to Alphabet. They exceeded expectations on the headline numbers ($6.04 vs. $5.59 estimated for EPS; $72.4 billion vs. $71.82 billion estimated for sales), and in revenue from Amazon Web Services, the company’s biggest segment ($7.43 billion vs. $7.3 billion estimated). But there are a number of reasons for caution.
That begins with the company’s Q1 sales guidance of $56-$60 billion, which was a little light compared to the $60.96 billion estimate. Just like Alphabet, investors seem worried about margin pressure and spending increases. Gross margins rose by 1.8 percentage points in the quarter, a sharp decline from the 4.6 percentage point increase from the previous quarter. CFO Brian Olsavsky also directly singled out India as a market in which there is some uncertainty, and if there’s one thing Wall Street hates it’s uncertainty, especially around the world’s biggest emerging market.
In terms of analyst reaction, analysts from UBS, Bank of America, and Pivotal Research maintained their current Outperform/Buy ratings and current price targets. Analysts from Morgan Stanley, Wedbush, and Raymond James maintained their Outperform ratings, but all lowered their price targets slightly.
In the wake of Apple’s guidance warning on January 2 (its first since 2007), the sentiment around the report seems to be an acknowledgement that they got the bad news out of the way.
Apple’s headline numbers both slightly exceeded expectations, as the EPS of $4.18 beat the $4.17 estimate and sales of $84.31 billion beat the $84.04 billion estimate. Q2 sales guidance was a little light however, coming in at $55-$59 billion vs a $58.99 billion estimate. With Apple though, it continues to be all about iPhones.
Though they’re no longer breaking down the unit sales of each business unit (perhaps because they expect iPhone sales to decline), we still got overall revenue numbers from each unit. iPhone revenue came in at $51.98 billion, lower than the $52.8 billion expectation. Software and services revenue came in at $10.88 billion vs. a $10.82 billion expectation. Together, those units account for about 75 percent of total revenue in the quarter.
As expected, revenue from Greater China declined as well, from $17.95 billion last year to $13.169 billion in 2018—a more than 25 percent decline.
For all of Facebook’s scandals in 2018, they definitely ended 2018 on a high note. Facebook reported Q4 EPS of $2.38, beating the analyst estimate of $2.19. Sales came in at $16.64 billion, beating the $16.41 billion estimate.
Both Daily Active Users and Monthly Active Users for December increased 9 percent on a year-over-year basis, in-line with growth rates from previous quarters. On the conference call, Chief Financial Officer David Wehner noted that the average price per ad rose 43 percent year-over-year, a dramatic increase for Facebook’s biggest revenue generator.
Microsoft’s Q2 EPS of $1.10 beat the $1.09 estimate, while sales also came in higher at $32.471 billion vs the $32.49 billion estimate. But the immediate reaction centered on cloud sales—the company’s biggest growth driver at the moment.
Sales of their flagship cloud product Azure increased 76 percent in the quarter on a year-over-year basis. That growth rate was in-line with the growth rate from the previous quarter, but down dramatically from a 98 percent increase from 2017-2018.
Though traders initially punished Alphabet and Microsoft, both stocks have regained their losses entirely. Apple and Facebook both saw huge spikes following their reports, and with the former continuing to rise while the latter appears to have plateaued for now.
The outlier here is Amazon, which is still down over 7 percent since its report.
Disclosure: the author holds no position in the stocks mentioned.
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