Head of Equity Strategy
Summary: The earnings and outlook from Apple, Alphabet, and Amazon were not impressive and investors pushed the shares across all three companies down in extended trading weighing on Nasdaq 100 futures reversing from their intraday high yesterday. For Apple it was the weak iPhone business, and for Google it was the cloud and advertising, while Amazon cannot escape the general slowdown. In today's equity note we also take a look at the Q4 earnings season, the cloud business slowdown, and what earnings to watch next week.
Disappointing earnings from Apple, Alphabet, and Amazon
The three technology giants Apple, Alphabet, and Amazon all failed to extend the momentum in technology stocks last night in Nasdaq 100 futures as they all disappointed relative to expectations. Apple’s miss on revenue and earnings were driven by weaker than expected revenue in the iPhone business which was mostly related to supply chain issues according to the company, but the other side of the story is that demand is weakening for consumer electronics due to inflationary pressures. Alphabet’s results across its advertising businesses also disappointed and costs remain a key issue for the technology group. Amazon beat on Q4 revenue and earnings, but missed against estimates on its Q1 outlook as the business is losing momentum in its online and cloud business. In this morning’s Quick Take we provide a bit more colour on the earnings releases including our views on other markets.
Nasdaq 100 futures have reversed from their intraday high yesterday trading below yesterday’s close as well with yesterday’s open at 12,528 being a key support level to watch should equities slide further in today’s session. With earnings from these giants a considerable share of the US market value has reported earnings and thus we can begin making some preliminary conclusions on the Q4 earnings season. The big winner so far has been European equities with earnings up 4.8% q/q and now surpassing S&P 500 in terms of growth in earnings since Q3 2019 and getting closer to Nasdaq 100. Earnings are down 3.3% q/q in S&P 500 and up 1.7% q/q in Nasdaq 100 suggesting the broader US equity market is giving back a bit of the earnings growth in Q3 while the technology sector is stabilising. Chinese earnings are down 7.6% y/y have deteriorated substantially since 2021 and are down more than 20% since the quarters before the pandemic.
Is the high growth era of cloud over?
One the things that caused both Alphabet and Amazon to disappoint, and also recently Microsoft, was the disappointment in the cloud business which is seeing a significant slowdown in growth. In Q4 2016 the cloud business for Google, Amazon, and Microsoft was a combined $38bn annual revenue business and has grown considerably to a $188bn annual revenue business in Q4 2022. No wonder investors have been betting on these three companies. Cloud has made its inroad into the business world. The selling points have been easy to deploy the technology infrastructure, it scales fast, the up-time and IT security are always excellent. Recently several businesses are beginning to complain about the costs of cloud computing and the lack of transparency in the cost structure for using the three companies’ different machine learning applications on top of just the cloud infrastructure (computing power).
The general slowdown in enterprise technology spending is quite evident now in the cloud business of Google, Amazon, and Microsoft with the revenue growth getting a healthy boost during the pandemic hitting peak growth at 34% y/y in Q3 2021. This growth rate has since slowed to 18.8% y/y in Q4 2022 on a trajectory to the lowest annual growth since Q1 2017. It begs the question of whether the explosive growth of cloud computing is finally coming to an end and thus pulling a growth engine out of these major technology companies. The operating margin has also steadily been declining due to higher operating expenses from among other electricity which has become more expensive due to the energy crisis. While both Amazon and Microsoft are running very profitable cloud businesses, Google’s cloud business lost $480mn in Q4 2022 and improvement from the $1.7bn operating loss in Q1 2020, but still unacceptable from an investor point of view. The reason is most likely that Google is subsidising the cloud business from its ads business to keep prices low to get market share as Google is by far the smallest cloud business of the three.
Next week’s earnings focus: Walt Disney, Siemens, and Toyota
The Q4 earnings season is not over yet with 243 companies in the S&P 500 Index having reported earnings. Next week’s earnings calendar will provide plenty of information for investors to chew on. The list below highlights the absolute most important earnings to watch and out of those the three most key earnings are from Walt Disney, Siemens, and Toyota.
The entertainment giant Disney is expected to report revenue growth of 7% y/y and EPS of $0.76 up 21% y/y and a lot of focus will be on Nelson Peltz, the activist investor that has gone into the company, and his quest for higher streaming profitability and potentially changing the asset portfolio of Disney. Siemens, one of Europe’s largest industrial companies, is expected to show revenue growth of 11% y/y and unchanged operating income compared to a year ago as cost pressures remain a key challenge for Siemens. Last quarter the order book and net new orders looked healthy, so the question is whether this will flow through into the outlook for 2023. Toyota is expected to report revenue growth of 19% y/y as demand for cars have come back, but the real interesting focus point on Toyota is further details on the new CEO’s aggressive move towards offering many more fully electric vehicles rather than hybrids. Toyota has recently indicated that they have made errors in their technology bet and looking to aggressively invest in battery EVs.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
