Google and Microsoft gain, it's time for Meta Platforms

The current week is full of the publication of interim results of the world's largest technology giants. Will the so-called AAA companies (Alphabet, Amazon, Apple) defend themselves against the first signs of an economic slowdown, or do their results merely confirm what the market has been speculating about for a long time? We already know the first data.

Alphabet (GOOGL.US)

Alphabet (GOOGL.US) shares are gaining 3.5% in pre-session trading after the company released its Q2 2022 earnings report last night. Key items from the report: 

• Revenue: $69.69 billion, up 12.6% y/y (expected: $69.9 billion)

• Google advertising revenues: $56.29 billion (expected: $55.91 billion)

• YouTube ad revenue: $7.34 billion (expected: $7.52 billion)

• Google Cloud revenue: $6.28 billion (expected: $6.41 billion) 

• Revenue from other activities: $193 million (expected: $300 million)

•  Cost of getting website traffic: $12.21 billion (expected: $12.41 billion)

• EPS was $1.21, down 11% y/y (expected: $1.28)

• Operating profit was $19.45 billion, up 0.4% y/y (expected: $20.33 billion)

• Profit from Google Services: $22.77 billion (expected: $22.91 billion) 

• Loss from Google Cloud: $858 million (expected: -$629 million) 

• Loss from other operations: $1.69 billion (expected: $1.22 billion)

• Net income was $18.52 billion, down 13.6% y/y (expected: $19.1 billion)

Alphabet's results were weaker than expectations, both in terms of revenue and profit. While revenues were higher on the yearly basis, this improvement is not evident at the operating profit level. This is due to an increase in marketing and research (R&D) costs. This resulted in a 23% year-on-year increase in operating expenses - nearly twice as fast as revenue growth. Operating profit remained virtually unchanged year-on-year, but net profit was more than 13% lower year-on-year. Why? In this case, the reason is one-time phenomena, specifically the inclusion of 2.6 billion in investment gains in Q2 2021. The absence of such gains in Q2 2022 translated into lower pre-tax profit and subsequently lower net income.

Despite the weaker-than-expected results, Alphabet shares are gaining in pre-session trading. This can be explained by reasonably consistent YouTube ad revenue and better-than-expected Google search revenue. The solid revenues eased concerns about the impact of the current macro situation on the advertiser's business.

Alphabet (GOOGL.US) is gaining more than 3% in pre-market trading following the release of results. The company tested the lower limit of the recent consolidation near $105 yesterday, but the chance of maintaining the range of movement increased after yesterday's publication. Source: xStation 5

Microsoft (MSFT.US)

Microsoft (MSFT.US) stock rose almost 5.0% in pre-market as robust guidance overshadowed weak fourth quarter results.

• Company reported EPS at $2.23, below market consensus of $2.29 partially due to extended Covid lockdowns in China and Russian aggression against Ukraine.

• Revenue rose to $51.9 billion, up 12% from the same period year ago, however missed analysts’ expectations of $52.45 billion. It is the slowest revenue growth since 2020

• Microsoft said that because of the strong dollar revenue decreased by $595 million and earnings by 4 cents per share

• Productivity and Business Processes: $14.4 billion versus $16.7 billion expected

• Cloud revenue rose 20.0% to $20.9 billion slightly missing Wall Street projections of $21.1 billion

• PC sales increased only 2.0% to $14.4 billion, below market estimates of $14.7 billion as "extended production shutdowns in China that continued through May and a deteriorating PC market in June", both of which "contributed to a negative impact on Windows OEM revenue of over $300 million."

• Capital expenditures $6.87 billion vs. $6.37 billion

• Azure grew by 40% compared with 46% in the prior quarter and below estimates of 43.1%, because of slower growth in consumption, from services such as computing and storage resources, CFO Amy Hood said. On the other hand, CEO Nadella said that the number of  $100 million-plus and $1 billion-plus deals increased significantly in Q4. Company did not disclose Azure revenue in dollars

• In the new fiscal year, expect double digit revenue and operating income growth in constant currency and U.S. dollars. For the first quarter Microsoft expects revenue in the region of $49.25 billion to $50.25 billion which reflects worsening PC sales and potential slower cloud infrastructure growth. These figures also came in below market expectations of $51.49 billion.

• “As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth," said CFO Amy Hood.

Despite the miss in the company's Intelligent Cloud business, Azure and other cloud services revenue rose 40% YoY which is a positive sign that despite the rough economic environment demand from businesses remains strong, which in turn should help the company go through the expected recession. Nevertheless, a lot will depend on the intensification of factors that had a negative impact on the fourth quarter result, i.e. a strong dollar and lockdowns in China.

Microsoft (MSFT.US) stock rose nearly 5.0% in the pre-market trading and is approaching a major resistance zone around $267.15 which is marked with upper limit of the triangle formation and 38.2% Fibonacci retracement of the upward wave stated in March 2020. Source: xStation5

Meta Platforms  (META.US)

EPS: projected $2.51 vs. $3.61 in Q2 2021

Revenue: projected $28.95 billion vs. $29.08 billion in Q2 2021 

The company will release its quarterly report after the 27.07 trading session

• Shares have lost 50% year-to-date amid the prospect of a recession and slowing revenue growth for technology companies. The company is weighed down by the strong U.S. dollar, which is likely to adversely affect margins. Meta is also struggling with growing competition from TikTok. CEO Mark Zuckerberg on a July conference call, as quoted by Reuters, indicated that the company is expecting 'one of the worst slowdowns we've seen in recent history.' The company has already laid off nearly 7,800 employees (10%) as part of a cost-cutting program; 

• Monetization of VR and AR technologies is a challenge for the company as part of the mega-cost-consuming Metaverse trend in which the Met is becoming more deeply involved. The company intends to introduce significant VR modifications to its Horizon Worlds platform and in August will raise the price of its 'Quest 2' AR headsets. Meta announced the significant launch of its new 'Project Cambria' AR headset later this year; 

• Meta Platforms' biggest challenge continues to be bypassing privacy blockers and updating its ad revenue model. The blockers introduced by Apple on iOS give users the option to opt out of personalized ads which affects the margins of Meta and other companies whose model relies heavily on advertising (including the recently losing Snap). Analysts will pay particular attention to ad revenue, however, they expect Meta to do better in this sector than the recently sinking Snap due to its established brand and larger number of advertisers.

The current forecast for the full year 2022 is for EPS of $11.43 (down 17% y/y) and revenue of $124.23 billion (up 5.4% y/y)

Meta Platforms (META.US) chart, W1 interval. The share price has been moving in a dynamic downtrend since the beginning of the year, and has dipped below the long-term support marked by the SMA 200 average, currently running around $230. Current price levels are approaching the record low valuations of mid-2018 and 2020, which may signal increased interest in the company's shares by contrarian investors. At the same time, disappointing results could pull the price down to the vicinity of $120 where the price minima, from 2018, are located. In the past, however, each time the company's share price has returned above the 200-session moving average. Three times over the past four quarters, the company has surprised with earnings per share growth above expectations. Source: xStation5

Despite the fact that Alphabet and Microsoft's results fell short of analysts' expectations, their shares are rising in pre-session trading.