Earnings season is well underway. Last week, we have gotten a glimpse of how technology companies are performing and if we can continue to expect to see technology trends, some of which have exploded over the past year due to the global pandemic, to continue growing at strength.
This earnings season is of marked importance for a variety of reasons.
For one, this is the first earning quarter that has lapped what was the beginning of the pandemic-led hypergrowth for many of these tech companies almost a year ago. For another, we have also witnessed over the past year, the unprecedented concerted effort in vaccine development and rollout in response to the pandemic. This rapid response has also led to the consequence of recoveries across many industry sectors. This also means, going forward, many companies can expect even harder comparisons as economic recovery moves into full swing.
Consequently, while it is expected that growth will decelerate for many of these tech companies, the big question many are trying to figure out is, to what degree would the deceleration be? Would it mean that the behavioral and circumstantial changes brought about by the pandemic that benefitted these tech companies would also disappear once life reverts back to “normal”?
Here I hope to share several observations and takeaways after sifting through the most recent quarterly results from some of the most notable tech companies.
#1: “Stay-At-Home” Tailwinds Softening
When the pandemic raged across the world last year, many countries instituted lockdowns. Consequently, as people were forced to stay home, this has led to a surge in online activities. Some of the biggest beneficiaries as a result, were those that operated consumer-facing tech i.e. video streaming, e-commerce, social media and etc. as people replaced what used to be outdoor activities with online offerings powered by technology.
With some of the biggest economies in the world progressing rapidly on their vaccination efforts since its availability circa October last year, many of these economies are on track and steadily reopening. This also has led to the resumption of physical activities for many and its effect can be seen.
When Netflix Inc. (NASDAQ: NFLX) reported results, we saw that Paid Memberships grew by 8.4% year-on-year in Q2 2021 versus a 27.3% growth in the same period last year. The company further gave a forecast of about 9% Paid Memberships growth for the next quarter. This is versus a 23.3% growth in the same period last year.
Facebook Inc. (NASDAQ: FB) similarly reported in Q2 2021 that Daily Active Users and Monthly Active Users both grew 7% versus 12% growth in the same period last year.
Perhaps the biggest surprise came from Amazon.com Inc. (NASDAQ: AMZN) who missed consensus revenue estimates driven by higher-than-expected revenue growth deceleration in their e-commerce business. Online store revenue has decelerated to 16% growth in the quarter versus 48% growth in the same period last year.
What we are witnessing is not entirely unexpected. While there are some signs of softening, it is far too early to tell how things will trend going forward.
#2: Enterprise Tech Continues to Strengthen
During the slew of imposed lockdowns last year, people were also faced with the need to conduct their work remotely. Consequently, various companies and organizations were forced to pivot and accelerate the adoption of work enabling technologies for their employees.
Interestingly, even as the economy starts to reopen physically and people are returning to the office, this quarter has shown that enterprises and companies are continuing to (and in some cases accelerating) spend on technology.
Microsoft Corporation (Ticker: MSFT) delivered results that were well above consensus estimates. The catalyst for this can be attributed to revenue growth from their “Productivity and Business Processes” segment grew 25% year-on-year versus 6% in the same period last year and “Intelligent Cloud” which grew 30% year-on-year versus 17% in the same period last year. Both these segments are clearly seeing growth accelerating.
Turning over to Amazon who despite seeing their revenue growth being dragged down by their “soft e-commerce” performance, saw Amazon Web Services (AWS), their Cloud Computing business accelerate to 37% year-on-year growth versus 28% growth in the same period last year.
Among many things, the pandemic has taught many enterprises the importance of having the right technology stack. This can be pivotal in ensuring the resiliency of business operations to systemic shocks. Gartner for example, is forecasting Worldwide IT Spending to top USD4.2 trillion in 2021.
What we are likely seeing is the acceleration on this front as enterprises and companies pick up their pace in their digitalization efforts.
#3: Uneven Recovery Around the Globe
Even with the availability of the vaccine, what we have learnt so far is that vaccine availability and the actual operations of inoculation are two completely separate matters. We are now seeing many South-East Asian countries that have coped very well in the early days of the pandemic, regressed today in spite of vaccine availability.
From the recent earnings report by Mercadolibre Inc. (NASDAQ: MELI), an e-commerce, digital payment, logistics and capital management company with operations centered in South America, it would seem that tailwinds resulting from the pandemic is still very much intact and may persist just a while longer. Revenue from their commerce operations have grown 96% year-on-year versus 79.5% a year ago.
Digging into Alibaba Group Holding Ltd. (NYSE: BABA/HKSE: 9988) we can also see that their International Commerce Retail segment revenue that includes revenue from Aliexpress and Lazada is seeing accelerating growth of 54% versus 30% in the same year ago period. This is in contrast with their domestic Commerce Retail segment that has grown at roughly the same pace of 34% both in this quarter and also the same time last year.
While it is still early to draw definitive conclusions, we can see early signs that the “reopening effect” on tech companies will not be one that is uniform, with some set to be able to capitalize on the pandemic tailwind a bit longer than others.
Some Parting Thoughts
There are some valuable insights for the tech investor from the recent earnings season.
For one, where tech companies are often lumped together under a single umbrella, it should be clear that tech investing is far from being unidimensional. The stark difference in tone and growth expectations from consumer-facing tech companies versus that of enterprise tech companies is particularly instructive.
From here, it does look like enterprise tech still remains a very attractive segment for investment. Many opportunities associated with workplace digitalization are still in their early innings. Case in point here is the accelerating growth of both AWS and Microsoft Azure that are still growing by healthy double digits in spite of each being multi-billion dollar run rate businesses!
While the headlines in the coming quarters may highlight growth deceleration especially in consumer tech, I believe what we are seeing is the development of many notable secular trends that will likely continue into the future long after we put this pandemic episode behind us. It is worthwhile to see that many of these companies are still growing on top of unprecedented windfalls brought about by the pandemic. If these shifts become permanent in future, they would bode well for the companies that have successfully executed to capture the market and widen their moat even further.
In the near term, we can certainly expect continued volatility in tech stocks going forward as companies continue to navigate tough financial and operational comparisons in the coming quarters as well as the effect of post-pandemic recovery. However, keeping eye on the long term can potentially reveal many exciting investment opportunities.
Overall, I would say that the earnings results from the various companies I follow have so far fallen in line with expectations. Quite a few more companies would be reporting their quarterly results in the coming weeks, from which, we should get a more solid picture for expectations going forward.
Disclosure: The author owns shares of Microsoft Corporation (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN), Alibaba Group Holding Ltd. (NYSE:BABA / HKSE 9988) and Mercadolibre Inc. (NASDAQ:MELI). Investors should conduct their own due diligence before engaging in any buying/selling of any of the shares mentioned.
