All except Facebook reported strong results with Facebook also disappointing on guidance. Here are a few details-
Apple AAPL
Apple posted strong results for the June quarter with revenue and earnings topping the Zacks Consensus Estimates by 1.7% and 7.8%, respectively.
Revenue growth was strong across geographies, with North America being the strongest, followed by Greater China, Other Asia and Europe, all of which grew double-digits. Services grew a whopping 31% and iPhones 20%, indicating that Apple’s strategy of launching expensive phones and capitalizing on its installed base is bang on.
This is particularly significant because iPhones are 56% of its total sales, while services are an extremely fast-growing 18%. So effectively, the company has a solid, proven strategy for 74% of its business. The Other category that includes things like its Watch and HomePod that Apple doesn’t tell us much about, are also growing very strongly, further locking people into its ecosystem.
There’s some difference of opinion among Apple watchers, with some liking its solid cash flows, services prospects and the amount it returns to shareholders and others arguing that its growth rates are coming down, indicating that other names are more attractive.
But considering its valuation on P/E and PEG metrics in addition to the above positives, Apple is a steal.
Amazon AMZN
Amazon posted strong results for the June quarter with earnings topping the Zacks Consensus Estimate by 103.6% based on revenue that just missed a very high Zacks Consensus Estimate by 1.1%. Currency contributed 2 points of the revenue growth of 39% and 6 points of the 375% growth in operating income. Earnings grew 1,167.5% from last year. TTM operating cash grew 22%. TTM free cash flow less lease principal repayments dropped 24%.
So obviously, revenue growth was just one factor driving the results. One of the other factors was revenue mix, which favored high-margin AWS and advertising (included in other). The FX neutral revenue growth rates of 49% and 129% in these businesses were far above the company average. Moreover, they are now contributing a combined 16% revenue share, so they’re having a greater impact on results. Subscription service ex-FX growth of 55% was another one to call out.
Cost management and operating leverage also contributed to the earnings growth. These factors usually vary between quarters depending on the amount of new infrastructure being built out. But it’s encouraging to note that the very strong revenue growth has led to a stabilization and even decline in the capex as a percentage of revenue.
The real fuel for Amazon’s business is data, just as it is with the big technology companies. Amazon has the largest amount of relevant data as regards people’s shopping behavior and payment information.
The avenues for data collection are being expanded constantly with the proliferation of Echo and Alexa (number of Alexa-enabled devices more than tripled in the past year). This helps it develop artificial intelligence and lays the foundation for a strong advertising business. Amazon is currently working on measurement tools that will help advertisers gauge ROI.
The one factor of slight caution is the debt level. The company raised a lot of debt last year but the debt cap ratio has been declining since then to more manageable levels. Rising profitability and cash levels means this isn’t necessarily a negative, just something to keep an eye on.
The shares look overvalued, so watch out.
Alphabet GOOGL
Alphabet posted solid results for the June quarter with revenue (ex-TAC) and earnings topping the Zacks Consensus Estimates by 2.3% and 24.3%, respectively. Currency contributed 3 points of the gross revenue growth of 26%.
Google numbers were as good as ever. Google advertising revenue grew 26% (revenue share 71%, drivers were mobile and desktop search, YouTube); Network advertising grew 14% (revenue share 15%, drivers were AdMob and programmatic); and Other grew 37% (revenue share 14%, drivers were cloud, Play and hardware). Other Bets, mainly Fiber and Verily, grew 49% (less than half a point revenue share).
The margin strategy remains same: focus on volume for Google properties with a willingness to sacrifice price and focus on price in the networking business, where Google gets only around a 30% share based on the traffic it sends partners. And revenue shared with network members dropped last quarter as a percentage of network sales due to mix benefits, partially offsetting the increase in TAC to distribution partners, most likely because of a deal adjustment with Apple.
The big takeaway is that despite regulatory pressure (a $5 billion EU fine was provided for in the last quarter), rising SBC, a higher tax rate and increasing competition, this is a company that continues to generate strong operating results and cash flows. Its investments in people, capex and compute power are fueling its leadership in artificial intelligence, which continues to super-charge every aspect of its business.
Moreover, despite its size and the volume of its business, it remains a growth company. Its PEG-based valuation indicates that there’s more room to run.
Microsoft MSFT
Microsoft’s fourth quarter revenue and earnings beat the Zacks Consensus Estimates by 3.0% and 5.6%, respectively. Currency increased revenue and earnings growth by 2 points and 4 points, respectively to 17% and 7%, respectively.
First-quarter revenue guidance of $27.70 billion at the midpoint was also slightly ahead of the FactSet estimate of $27.35 billion. More Personal Computing revenue of $10.10 billion (versus $9.87 billion estimated), Intelligent Cloud $8.25 billion (in-line) and Productivity and Business Processes $9.35 billion (versus $9.34 billion estimated) contributed to the upside.
Management has done a very good job turning the company around from a provider of legacy solutions to a leading provider of enterprise solutions whether on premise, or in the cloud or in facilitating a transition to the cloud through partnerships, collaborations and acquisitions.
And that is why its Azure cloud business delivered FX adjusted 85% growth in the last quarter off a growing base. It’s also why Office 365 commercial, Dynamics 365, Gaming, and Xbox software and services grew a respective 35%, 56%, 38% and 35%. Other important product lines like servers and Surface also grew strong double digits.
Microsoft is a company generating solid cash flows from a legacy business that is supplemented with momentum in several other high-growth markets. It is another company investing heavily in artificial intelligence that it is both infusing in its own operations and offering to customers.
The shares are however overvalued, so best avoided unless it’s for the long term.
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Facebook FB
Facebook’s June quarter sales missed the Zacks Consensus Estimate by 1.45% while its earnings missed by less than a percent. This is the first time it missed estimates in the last seven quarters and the first time on both the top and bottom lines.
Mobile ad revenue (91% of the business) grew 50%, both DAUs and MAUs were up 11%, the average price per ad increased 17% and the number of ad impressions increased 21%. Payments and other fees, making up the remaining 9%, was up 23%. None of this was too bad.
But significantly, expenses also increased 50% with full-time employees up 47% as it tried to deliver on its security and privacy promises.
Moreover guidance was for continued deceleration in the revenue growth rate through the rest of the year accompanied by a 50-60% increase in expenses versus last year. Not all of these expenses will be recovered soon either: management said that while AI related epenses will improve results in the near term, AR and VR related expenses have a longer payback period.
But with deceleration in revenue growth and acceleration in expense growth, management expects a hit to profitability. This could be a conservative estimate, but it’s enough to be concerned about, especially considering the privacy, security and fake news issues Facebook has been caught up in recently.
Facebook is overvalued except on the basis of PEG.
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