Ep.88: Tech Giants Lose $1 Trillion In One Week!

Okay, hello and welcome to episode 88 of the Market Maker podcast. And as you can see, if you're watching this on the YouTube version of this episode, I'm on my own. I would normally be joined by Piers or Stephen, but both are on vacation this week, so you're stuck with me, I'm afraid, to run you through really two things. Gonna get you up to speed on some of the major headlines from the week quite quickly, quick wrap around the major headlines, and then we're going to delve into some of the large-cap tech earnings we've had throughout the week. I'm sure you must have seen some of the headlines where the likes of particularly Meta or Facebook and Amazon have cratered more than 20%, and we'll find out why and discuss some of the others as well, like Apple, Microsoft, and Amazon. But let's get straight in and talk about some of the major headlines. I'm recording this on Friday the 28th of October. So Elon Musk has completed his $44 billion takeover of Twitter. You might have seen him walking into Twitter HQ with a porcelain sink saying, "Let that sink in." Well, the puns have been flying overnight. He tweeted, "The bird has been set free." And so he will now become the CEO of Twitter, SpaceX, and Tesla, as well as be the CFO of Twitter, all at the same time. So we'll see how that pans out. Otherwise, some other major things that have been happening. Chinese stocks got hammered at the start of the week at the close of national congress meeting that they had, and it saw essentially Xi Jinping consolidating further power over the nation, and that spooked the market because of things like the zero COVID tolerance kind of approach that they have. And what it's going to mean then is that that's unlikely to change as a strategy. Further than control from the state over what public companies are doing, and equities don't like that type of action. So Hong Kong equities actually fell to a 13-year low as of this week. To give you a stat, there's one I, I picked up. The total sell-off now in Chinese equities onshore and in Hong Kong has come to around $6 trillion since the peak in February. Of last year. So to give a bit of perspective, that's a huge number because when we talk about tech, just this week because of earnings from the tech titans, it's knocked off nearly around a trillion worth, um, from market caps from those names. But we've lost 6 trillion as far as the stock market's concerned in China. Um, elsewhere, the ECB delivered their second consecutive 75 basis point rate hike to tackle inflation, but importantly, they softened slightly their rhetoric about what we're to expect in terms of multiple future rate hikes. So very subtle language changes. I did talk about this a little bit on the Amplify Me LinkedIn account where I put out posts daily. So if you're not following us on there, please do. Um, but basically they were alluding to the fact that instead of several, they are going to hike, but less committing to that many at this point in time. And actually the euro fell despite very aggressive hiking action, which is quite unprecedented really for the ECB if you think about it. And then over in the UK, the pound has hit a 6-week high. Um, yeah, never thought I'd be saying that around 2 or 3 weeks ago, but of course, as you well know by now, Rishi Sunak is now the Prime Minister, and he and Chancellor Jeremy Hunt, who's saved his role at least for the time being in the cabinet, have delayed their economic strategy until November 17th. They were supposed to give a bit of a budget update at the beginning of the week, but they decided to delay that, and Sensible action. Obviously, this is the opposite of what we had trying to be rushed through by the previous double act of Liz Truss and Kwasi Kwarteng. Um, talk at the moment is that the government is now exploring tax increases and public spending cuts worth up to £50 billion a year to fill the gaping hole in public finances, according to allies close to the Chancellor. So again, whatever Liz Truss put forward has been completely torn up at this point in time. And from a market's perspective, they're liking it. And it's not like it's a rishi rally. There certainly has been a bit of a backing off in the US dollar at the same time. So it's not just a singular narrative about the pound, but let's say a lot of the anxieties definitely that were prevalent driving UK assets just a few weeks ago have fallen away quite considerably. One thing though, it does mean that the delay until they come out with their economic strategy, not for another 3 weeks or so, means that the Bank of England will now need to make its next interest rate decision on the 3rd of November without the benefit of knowing the full direction of travel, of course, of what's going to be set by the government. So it does make it quite a tricky affair for the bank to, to handle. And then, yeah, earnings, very busy week. Of course, I think there's 165 S&P companies. Obviously I'm recording this Friday morning, there's still more to come today. I think we've got the energy majors, Exxon, Chevron, so on, but I'm going to focus on the tech stocks predominantly. We're going to delve into each one, one by one, just to look at what caused, um, the weakness. In, in this case, nearly $1 trillion has been wiped off the value of the biggest US tech companies before seeing a bit of a partial rebound, at least at the moment I'm recording this. Despite that though, the S&P 500 is heading for a second week of gains, and if that does materialize, that's the first time since August. So we'll see where the land lies by the closing bell on Wall Street tonight. But to kick things off, I'm gonna start in order of worst to best. Um, and one of the ones I thought that was surprising, because Meta was almost— I could put in the category of catastrophically bad, but we kind of know what the deal is somewhat with Meta. I'm going to talk about Amazon first because Amazon's shares, when I was watching them last night, crashed 20%, which is huge for a company of that magnitude. Of course, um, their Q3 earnings missed estimates. They had a huge miss on their sales outlook for Q4, and Q4 obviously is critical, uh, given their business model around the holiday Christmas season. So let me just run you through a couple of highlights from their report. So their earnings per share did actually exceed expectations, but revenues fell short. Um, $127 billion US dollars, evidently not enough to satisfy market expectations. Um, Amazon Web Services, the AWS, this was key, and that missed expectations. It came in at $20.5 billion. The Street was looking for $21.1 billion. However, advertising continued to pick up and did actually exceed expectations. So a couple things here. They were the numbers for Q3. The thing that the market really latched onto was the company said Q4 revenues. And as I said, this is a key period for the company over the Christmas season. And they said that they foresee revenues in a range of $140 to $148 billion. I mean, that's a ginormous figure. However, the Street was looking for $155 billion, and that is well short of that marker. They also see operating income to be between zero, nothing, to $4 billion. The Street's median estimate was $4.66 billion. And in fact, when you look at Amazon's operating margins by segment, if it wasn't for AWS, Amazon would have a negative operating income. A few other key facts to bring to your attention. Despite Jassy, who's the CEO now, obviously now the departure of Jeff Bezos, despite his pledge to cut costs, Amazon reported operating expenses which jumped almost 18% to $125 billion. It was the 5th consecutive quarter of the company's expenses having increased faster than revenue growth. And this is something we'll talk about a little bit when we get to, to Meta and Facebook. Obviously, what's going to be important is the holiday season. As I've said, investors are counting on the fact that Amazon is going to boost profits and sales while trimming costs through hiring freezes. They've also been quite active in cutting experimental projects. So, you know, all of this kind of breadth that we see of tech companies looking to invest in multiple kind of R&D projects, you know, when the going gets tough, those are the first things to get cut. And that's evidently what's happening at the moment. There was a bit of a, a silver lining though in the numbers, and that was their advertising business. And the reason why is because it's bucked the trend, certainly, than what we've seen through other digital advertisers. So not just Meta, but the likes of Google, Snap, all those types of names who have obviously suffered given the macro environment, seeing companies pull back on their budgets for digital spending. So Amazon's advertising has, has gone the opposite direction, essentially. So they've had a pickup of 25% in ad revenues. If you look at it over a year-over-year basis, they're now tracking at around $9.55 billion for the quarter. That was above expectations of $9.48 billion. The problem, though— or not a problem, I'd say— the, the nature of the fact that they're more new to that space in the market means that, to give you an idea of context, So they've grown 25% surge in ad revenue year over year to $9.55 billion. In the last quarter, Google made $54.5 billion. So there's some way to go for Amazon, but if you're looking at a 25% uptick year over year and also it's increasing in this macro, this macro climate, then certainly people like Google are going to get a little bit anxious about the speed of their pickup. So yeah, that's one certainly interesting spot, uh, going forward. All right, moving on, let's talk a little bit about Meta then. They're my kind of, uh, silver medal for the worst earnings of the week, uh, and they crashed a lot yesterday, um, earlier this week. They fell almost 25%, I think, at one point. Their earnings missed dramatically— $1.64 earnings per share against $1.89. Revenues were actually just above expectations. Their daily active users were in line at 1.98 billion. Monthly active users were actually a touch above. But it already comes down to this recurring theme of 3 major significant challenges that the company is facing: a broad slowdown in online ad spending, challenges from Apple's iOS privacy changes, and increased competition, of course, uh, as Zuckerberg has been talking about a lot, from the main competitor TikTok, which is taking away a lot of their traffic. The company said Q4 revenue— so that outlook would be between $30 to $32.5 billion. The Street was looking and more focused on the top end of that range, so that was disappointing. If you thought that the pivot and betting on the metaverse was going to rescue the company, you'd have to think again. Because Reality Labs, which is where all of this is concentrated within these business segments, their revenue came in at $285 million, and that's well below expectations of $406.3 million. To put this in perspective, so far this year, Reality Labs which is kind of what they've hung their hat on for the future of this business, has lost almost $10 billion. So that's tough going at the moment. And the question really becomes, can this company pivot quick enough in order to play true to this story when they can start to really make that a performing business division? So a few other things before I go into that more. It does get worse. The company also said that FX would add a circa 7% headwind to year-on-year total revenue growth in Q4. So the easiest way to think about this, this Meta story, it's relatively straightforward. Its revenue has slowed dramatically over the past 3 quarters, but spending has not. And it's pretty obvious what will happen if that continues for too long. Uh, so in 2021's Q3, So the same comparative year over year, um, the company generated almost $10 billion in free cash flow. In 2022, it's almost none. Um, so a whole slew of banks on Wall Street have come out this week and they've all slashed their price targets for the company. So yeah, tough week for our friend Mark, for sure. Number 3 then, on the spot, is, uh, Alphabet, uh, their shares were down nearly double-digit percentage, uh, the day after they came out. Their EPS was quite a large miss, $1.06 against $1.25. Revenues were softer than expected, advertising revenues missed. Um, the only kind of one bright spot on the figures for the quarter was their cloud revenues, which did come in slightly higher than expected at $6.87 billion. So again, perspective I think is useful. Revenue growth slowed to 6% from 41% a year earlier. Company obviously is contending with this continued downdraft in online ad spending. One thing to be aware of with their advertising model though, which I think is a, an interesting thing, um, or categorization to make, is the split between YouTube and their Google core search business, because the latter obviously is typically insulated from the economic swings of social media advertising. And that part actually did grow. It was up 4% at $39.53 billion, but even that was still slightly short of Street estimates of nearly $41 billion. Obviously, given the situation, the predicament, they are cost cutting. Google also canceled the next generation of its Pixelbook laptop. They've cut funding in its Area 120, its in-house incubator. And last month Google said it would be shuttering its digital gaming service Stadia as well. The saving grace is of course the best margin business. So this is similar to AWS, and obviously Microsoft have their slice, but Google also— Google's cloud business did report $6.87 billion of revenue, and that was slightly above expectations. Remarkably, despite a lot of the news you might have read this year, Uh, of all of Google's plans to limit hiring, the company still added more than 12,000 employees during the quarter. So Alphabet-wide, that's now more than 186,000 employees, and they've actually doubled the company's headcount in just 4 years. Um, so yeah, I mean, at the moment Google's sat, um, just under $100, trading at $92 last Um, so, and with all of these, barring probably the last one I'll talk about, which is Apple, they're all pretty much back to pre-pandemic levels of where we were in early 2020 now. So if you're a long-term investor, you know, is this an interesting, uh, entry point? Um, yet to be seen whether or not this market still has some way to go at this point in time, not forgetting We of course have the Fed decision coming next week. All right, let's have a look at Apple then. Apple beat estimates on both its earnings per share and its revenues. Their EPS $129 against $127, revenues $90.15 billion. That was higher than expected, but their iPhone revenues missed, uh, Mac revenues exceeded, iPad revenues missed. And service revenues missed. So let me break this down. Although Apple's iPhone business increased sales by over 9% on an annual basis, it did come up short, as I just mentioned, against analyst expectations. However, Apple to me is the master of kind of forward guidance. And what I mean by that is there's been lots of warnings over the previous few weeks that iPhone 14 sales would be a disappointment. And Apple definitely involved in that communication, even though it's not coming from the company itself. They can use other methods. Typically a traditional one would be the Nikkei News in Japan, where they would talk about chipmakers and, and demand production rates. And so you start to drip feed into market psyche so it can be discounted in price. The fact that actually you've got more of an insight about potentially a weaker demand aspect for the new iPhone, and therefore it's already baked into price by the time you come out with the definitive numbers. And guess what? The iPhone sales come in slightly lowballed against the Street expectations. So the disappointment there was largely cushioned, I would say, by proactively front-running it, which is very— I think, I think something that Apple does very well. and they've always have done every earnings season. The company's service business. So what is that? That includes things like music, TV streaming platforms, Apple Card, iCloud storage, other digital offerings that also missed expectations, rising just over 5% year on year. But again, context, that's actually the lowest annual growth in history. And services is definitely the sweet spot of where they want to grow. It's a definite case of just a basic business model and how you can value a company. Because if you think of hardware, that can be quite restricting. Because if I was to buy a Mac, for example, I'm not refreshing my Mac particularly that often. I mean, if I was to buy— I mean, I recently got a new MacBook, but that, I'd say the one I had before that was probably purchased 7, 8 years ago. Whereas with a service-based recurring revenue stream, this is what's becoming interesting. And that mix is so important. We've seen this shift away from those hardware devices like the iPhone have been happening, of course, for many years. And that's why it's a little bit sensitive, the stock, when the service business underperforms like it did in this quarter. Apple added that digital advertising, gaming areas are also seeing some softness, and they see nearly a 10 percentage point negative year-on-year impact from FX. To put that in perspective, that's much more severe than any of their other tech peers. Microsoft said cloud sales are going to be hit around 5%, so half of what Apple are saying is going to be the FX impact for them. How to avoid disappointment? Um, I think another genius communication strategy tactic of Apple is Obviously they've already pivoted away from specifically talking about unit sales and things like that because it kind of pins then a definitive measure that's very hard to kind of manage over the long period. So you're kind of trying to find ways to manage or create stability in your share price. So by being a little bit more vague on some of these figures helps. And with Apple Absolute genius, really, because as I've talked about Amazon in particular, but also with Facebook or Meta, their outlook was what really impacted their share price after market. What was Apple's outlook? Well, they don't issue one. They haven't actually provided guidance since 2020 because they've cited uncertainty. And obviously that came in when the pandemic took hold and they just haven't removed it. So all you do is just go quarter by quarter. And yeah, I mean, you could say it's a double-edged sword because the outlooks are supposed to provide a suitable landing zone, if you like, to manage then expectations, so to decrease volatility and share price to some respect. But as you can see, you know, when you're a tech company and you're highly valued, the markets are hungry for you to hit pretty high numbers. So in the downturn economic environment, it's actually, I think, um, quite suitable to be a little bit standoffish and then just guide more short-term as you get more visibility. And obviously, in a Trump-esque, Elon Musk-type style, I'd be talking it up when the— when it's looking more favorable and stay a little bit more quiet as it's on its way down. And certainly, I think that you know, when other companies like this week are so remarkably bad in their share price reaction, it tends to also act as a nice distraction at the same time. So Apple actually was pretty flat overall. It didn't really move the needle a great deal. And then last place, Microsoft. Um, Microsoft were actually down, but nowhere near as bad as some of the others. Uh, their earnings per share beat, their revenues beat, their cloud unit was pretty much in line, uh, and their personal computing revenues beat. So overall sounds pretty good, right? So Azure, their cloud division revenue grew 35% in the quarter, but that was compared with 40% growth in the previous quarter. And from a percentage increase perspective, the Street was a little bit more hungry for something in tune of 37%. So revenues from sales of Windows licenses to device has dropped 15% year over year, uh, worse than the outlook that Amy Hood, who's Microsoft's finance chief, gave in July for a decline in the high single digits. So beyond the metrics of the quarter, perhaps then not quite as good as it may have appeared on a surface level. Some traders as well noted a really interesting point, because whenever any of these companies report their earnings, they generally give a presentation. So this is a presentation when they'll speak to the analysts on the street to talk through a little bit more the numbers, to give it some rationale and clarity. Now, some traders pointed to problems, and particularly potentially affecting cloud margins, as Microsoft slideshow discussed rising energy prices are boosting the costs of delivering cloud. Now, it wasn't particularly specific, but it was interesting because this hasn't really been talked about before. So I do think it is something to keep an eye on because, as I mentioned with Amazon, if it wasn't for AWS, that business would be in trouble right now because the margins are just so great on that, on that division. But if that starts to change, as energy prices need to be factored in, this could be, could be interesting. Um, there was though an important milestone, I thought, for Microsoft in the company's ongoing diversification. Um, and I think that's quite key. We've talked about this with things like hardware and software, from like an example with services and, and some of the products that Apple have. So with Microsoft, it's the first time that revenue in the quarter for Microsoft's cloud metric encompassing Azure, commercial Office 365 subscriptions, commercial parts of LinkedIn and Dynamics 365 exceeded 50% of the overall company revenue. So it's tipped over 50% for the first time in the company's history. I do think that that is quite quite meaningful. Um, so that is it. That is all of your really tech earnings. So hopefully that, that was useful overall. Look, I don't think, um, well, I was going to say I don't think any of the, the news that's come out for these companies is systemic, but Facebook, of course, Meta Platforms, is the one to watch. I mean, there are some frightening stats flying around about Zuckerberg's personal wealth, but Beyond that, their share price is down, I think, nearly 80% on the year, which is quite incredible. So the question for them is, can they continue to put in enough cash to make the Metavision work, uh, and how long is it going to take? Because at the moment there's not enough coming in, and, uh, that imbalance, as we saw for Liz Truss ended only in one way. So for me, I'm going to call it— we've called it for many, many months on this podcast, um, it's already begin— been the beginning of the end for Facebook. Um, that hasn't changed, uh, still hold on to that view. This is just another bump on that slide downward of inevitability, I'm afraid, as far as my view is. If I was going to pick one, the one I still like the most, um, if you go back to an episode that Piers and I did maybe several months ago, um, we had a question in from, from you guys, the community, and you were saying, um, can we battle it out and who would we pick out of the tech giants as the ones that we like the best for future? Um, I still like, I still like my double pick of Alphabet and Microsoft. Guns ahead. I still like that. However, you can't, you can't bet against Apple. When you were talking— when I was talking about the fact that a lot of them have pulled back, um, to levels that are pre-pandemic, um, kind of retracement, Apple hasn't. Uh, and the rate at which Apple continues to conduct its buybacks, uh, to buoy its share price, um, I definitely would have them in my mix long term. For sure. I guess, to be honest, with all of these I'd have a little bit of exposure. And again, this is not investment advice, just, uh, me, um, talking out loud. Facebook's the one that I wouldn't, uh, not that that helps a great deal. All right, good stuff. Hopefully that was useful. And yeah, Piers will be back as of next week. Thanks for listening. If you don't already do so, please do subscribe to the show. Drop it a rating. It really helps get it out to as many people as possible. And yeah, I'll catch you next week. Take care. Thanks very much.