It had been an extremely volatile week for the stock exchange as we saw prominent large-cap tech stocks retreat heavily due to less-than-satisfactory earnings. This has been a challenging time for most of us investors and if you’re in doubt yourself, rest assured that it’s not just you.
We’re all in this together.
The diagram above summarizes the entire week’s “action” where of the 5 large-cap companies that reported earnings, 4 of them experienced heaving selling pressure upon earnings release. With this, I believe that there is still much fear and uncertainty surrounding the situation with many investors still unsure of what exactly is going on!
I will briefly cover each of these companies and share which I think are still investable at the time of writing.
In order of Earnings Release, Week of October 24th 2022
- Microsoft 25/10
- Alphabet 25/10
- Meta 26/10
- Amazon 27/10
Happy to declare that I have a position in all the above companies at the point of writing.
1) Microsoft (NASDAQ : MSFT)
- Microsoft is facing headwinds in almost all their operating segments
- Top-line growth was weakest year-over-year and all its segments saw weakness.
- Attributed mostly to slowing consumer (both B2B & B2C) demand for their services.
- Weak PC sales contributed to this as well as a decrease in demand for gaming services.
- Other issues include supply chain constraints and impairment behind the strengthening US dollar.
How the market reacted
Microsoft fell by almost 10% at its lowest this week but buyers came in strong towards the end of the week with a bullish-engulfing pattern forming by market close on Friday. As such, Microsoft lost a little less than 6% of its share price with this earnings release.
Overall, market sentiment is definitely more bearish given recessionary fears along with the contraction in consumer spending. In addition to this, uncertainty also surrounds the Activision Blizzard acquisition as there are fears in some countries that such an acquisition would lead to unfair competition. Needless to say, should this acquisition fail, Microsoft would surely see more weakness.
I am a Microsoft bull but I do acknowledge that these headwinds are unlikely to dissipate in the near term hence I do think that current support levels may break. I’ll be looking closely at the $200+ levels as an area to dollar cost average into.
2) Alphabet (NASDAQ : GOOG)
- Slowest rate of growth at 6% compared to 41% in 3Q 2021. Markest slowest growth since 2013.
- While ad revenue continues to increase slightly, management cites how corporates are pulling back on ad spending.
The main problem with Alphabet is that investors often see this company as a good mix between growth and value. Alphabet traditionally grows at a little less than 17% year on year however with their recent growth at only 6%, it is likely that the market is pricing in the possibility that we could be at a tipping point with regard to their growth story.
As a value play, I still think that Alphabet shines given that they are FCF positive ($16b this quarter) and trading at a PE of 19.
I would like to take readers a little deeper into the issues surrounding Alphabet.
Reference to their earnings report above, we can see that if we remove changes in currency fluctuations, they actually managed to grow their revenue by 11%.
This means that the strengthening of the US dollar is actually hurting their revenues as much of it comes from international markets. While mainstream media tends to downplay this, it is important for us to note that one bearish theme surrounding these large-cap companies is the issue of currency fluctuations.
In my opinion, Alphabet is a buy as at the end of the day, they are cash flow positive and indeed generating income for their shareholders. However note that the company is not without risk as issues such as their continued hiring (through this recession?) and stock-based compensation scheme continues to cause doubt among investors.
3. Meta (NASDAQ : META)
Meta made new lows this week having shaved off another 1/4 of its market cap. The stock closed at $99 on Friday with hardly any investors coming in to buy the dip (unlike Amazon). At these levels, the price action has broken below the $100 support level and is currently trading at levels last seen during the pre 2018 economic crisis. It is most unfortunate for me to infer that the next support level for us from here would be the $75 range where the stock consolidated back in 2015.
While a plethora of problems plague Meta, I summarize the key problems raised during this recent earnings call as follows,
- Revenue decreased by 4% year-on-year. Attributed to slowing demand for advertising (Same scenario as google)
- Impairment from currency where if we analyzed revenue from a constant currency basis, revenue actually increased by 2%. Nonetheless still slowing growth.
- 9% Increase in expenses. At surface value, investors see this as Meta spending massively on the Metaverse.
- Net income decreased by half as compared to 3Q 2021.
From here, this begs the question if Meta will ever recover or if this is indeed the end for them. In my opinion, I personally believe that Mark Zukerberg would never let his ship sink hence we just have to trust that management is inclined to produce better results the next quarter. To achieve this, they must address the issues behind both revenue and operating costs.
With regards to revenue, I believe that there is a bull case for revenue to increase in the coming quarters due to the following,
- Family daily active people is not decreasing. Users have not gone anywhere.
- New ad avenues yet to fully materalise such as Reels + Whatsapp + Messenger.
- Economy may recover and with that, more budget for advertising.
- Impairment from currency fluctuations is temporary.
- Operating expenses and expenditures are NOT fully for metaverse-related projects. At present, they are aggressively developing their Discovery Engine which will help advertisers to target people more effectively. This may help to mediate some of the after-effects of Apple’s privacy changes.
4. Amazon (NYSE : Amazon)
Like the others, the share price of Amazon also fell this week where it hit a low of $90 in the after-hours trading on the 27th. Fortunately, buyers came in to pick up shares during the dip and the stock was able to rebound past the $100 levels ending the week at $103.41.
In summary, this weakness can be attributed to just 2 things and that’s
- Fluctuations in Currency
- Weak 4Q 2022 Guidance
While overall net sales increased by 15%, “International segment sales decreased 5% year-over-year to $27.7 billion, but increased 12% excluding changes in foreign exchange rates.”. Issues surrounding exchange rates should be a familiar theme by now hence it was possibly their guidance for 4Q2022 which was the nail in the coffin.
Amazon said it expects to post fourth-quarter revenue between $140 billion and $148 billion, representing year-over-year growth of 2% to 8%. Analysts were expecting sales to come in at $155.15 billion, according to Refinitiv.
Amazon stock sinks 13% on weak fourth-quarter guidance
Perhaps I’m the fool here but I find it hard to find any bearishness in the above comments. Amazon has consistently met its guidance in the past and should revenue for 4Q 2022 come in at the lowest end say $140billion, this would still be their highest revenue yet given that their previous highest quarterly revenue was $137 billion (achieved in 4Q2021, diagram below)
I’m still bullish on Amazon and I cite macroeconomic factors as the reason for this weak quarter. While some might argue that there is some impairment from the Rivian losses, by and large, I do think that Amazon’s business is still robust given that both their AWS and advertising sectors did fairly well this quarter.
- Amazon Web Services: $20.5 billion vs. $21.1 billion expected, according to StreetAccount
- Advertising: $9.55 billion vs. $9.48 billion expected, according to StreetAccount
Here is what JPMorgan has to say,
JPMorgan: “Not thesis changing” and “buying dip.”
Price Target: $145 from $175, reiterates “Overweight.”
“We believe the pressures on AMZN’s business are largely macro-driven, and not fundamental. And as we’ve already seen w/rationalization of the fulfillment network & headcount, AMZN is balancing its investments between the near-term macro environment & long-term strategic opportunities,” JPMorgan said.
“We continue to believe that AMZN is on track to improve profits in 2023, w/FCF inflecting, albeit at lower levels than previously expected. Accordingly, while the degree of macro impact going forward is unclear, we do not believe the current pressures are thesis-changing,” JPMorgan said.
Should I buy this dip?
In my opinion, it seems apparent that the bears are in control this time round as we’re not looking at a mere 4-5% sell-off. For large-cap stocks to sell off this much does indicate that investors are taking these headwinds seriously.
Fundamentally, these companies still seem robust however if I were to pick one, I would personally choose Microsoft simply because of how diverse their business is across all segments from government to business to consumer. That said, with current selling pressure, I do think that the $200+ levels should be watched closely.
If it’s 1 stock amongst these 4 that I would avoid, that would most certainly be Meta. While all 4 companies suffer from the same macroeconomic problems such as currency fluctuations, supply chain disruptions and a slowing economy etc., Meta has one more problem and that’s their pursuit of the Metaverse.
I have no doubt that we may very much one day be living in one but the days of non-profit generating projects are over. Investors these days are a little more short-sighted in the sense that they have very little tolerance for segments within a business that is loss-making. I speculate that even if Meta manages to turn around their revenue, that investors would still be cautious as thoughts of the Metaverse at this point in the economy doesn’t exactly spark “joy”.
