Big Data Headaches Overshadow Big Tech Earnings

Big data

For the first time in years, multibillion revenues and huge user volumes may not be the main focus when giant Internet companies report quarterly earnings. After Facebook’s user privacy debacle vaporized as much as $100bn in market value, just as much attention is on declining trust. At best, since the scandal broke in mid-March, FAANG shares – Facebook, Apple, Amazon, Netflix, and Alphabet’s Google - are flat. Only Netflix and Microsoft are slightly up.

Tech backlash

The crisis did not come out of the blue. Authorities have become increasingly hawkish over the years about potential erosion of privacy by web firms. At the same time, regulations are tightening on other fronts. The European Commission fined Alphabet $2.8bn last year for burying rivals’ search results. EU regulators are now weighing whether Google’s Android platform confers unfair bias, with a bigger fine and lower mobile revenues possible. In May, Europe’s General Data Protection Regulation will come into force. Web companies will then have to seek consent to use personal data. Many customers won’t give it. Less-personalized data will pressure ad prices. If customers take up their right to delete or transfer their data, cloud revenues could also be hit.

Netflix stock leads

Forthcoming earnings may show few traces of such concerns. But investors will be sensitive to how quickly top Internet firms could become less dependent on gaming privacy. Netflix shares notably surged last week after first quarter (Q1) revenue rose 40%. The group carries no third-party advertising, whereas Facebook made $40bn in annual revenue almost completely from advertising. Netflix surveils customers too. But it treats customer data as an asset, not a product, like Facebook. This helps explain why Netflix stock is up 70% this year, double Amazon’s rise, for instance.

Facebook revenue dip expected

Facebook’s Q1 could therefore sound be an early warning about the personal data-driven ad business. Even if its quarterly revenue meets expectations, Wall Street attitudes could harden if #deletefacebook led to further slowdowns among North American and European active users. Consensus forecasts project Q2 revenues at $12.95bn, up 39%, which would be Facebook’s weakest second quarter growth rate since 2015.

Facebook Q1 Earnings - 25^th April after market close (AMC)

Revenue consensus: $11.45bn, up 42.6%

EPS consensus: $1.37, up 31.4%

Alphabet still mostly about Google

Although Alphabet’s ad sales growth continued to chug along in Q4, the onus is on aggressive efforts to diversify, with, so far, mixed results. Expenses jumped 27% year-on-year in the final quarter of 2017, faster than non-advertising revenue growth, leaving profits below forecast. Nerves about Alphabet’s over-reliance on ads could weigh on the stock further, if costly moves continue to hit profits.

Alphabet Q1 Earnings scheduled 23^rd April (AMC)

Revenue consensus: $30.3bn, up 22.42%

EPS consensus (Non-GAAP): $9.33, up 31.4%

Amazon overspend

Like Netflix, Amazon stands apart from Internet behemoths. It accounts for just 3% of U.S. digital ads. With Microsoft, it stands to gain if marketing revenues flee the Google-Facebook duopoly. Till then, key Amazon’s niggles are also about expenditure. Amazon Prime membership of 100 million implies the group subsidizes the scheme by up to $10bn. And with capital expenditure accelerating 40% last year to $9.24bn, profit was flat, despite another robust contribution from Amazon Web Services (AWS). Investors will react to any signs that spending could outpace the cloud.

Amazon Q1 Earnings scheduled 26^th April (AMC)

Revenue consensus: $49.97bn, up 40%

EPS consensus (Non-GAAP): $1.30, down 12%

Microsoft’s gem: Azure

With the transition of Office subscriptions to the cloud largely complete, there are good reasons to see Microsoft’s net income of $6.6bn in the prior quarter as repeatable. At the same time, its Azure suite is becoming the go-to back-up option in case of an AWS outage, lifting Microsoft cloud sales more than 90% for the tenth quarter in a row. At some point, that pace will slip and shares will follow.

Microsoft Q3 Earnings scheduled 26^th April (AMC)

Revenue consensus: $25.83bn, up 9.6%

EPS consensus: $0.86, up 17.6%

Apple glued to iPhone

As the biggest tech of them all, Apple is arguably the least vulnerable to tougher regulation and growing anger on privacy. iOS accounts for just a fifth of major European phone markets, for instance. Apple also stringently protects customer data from marketers and governments. The group’s Achilles heel is the iPhone, sales of which buffet or buff Apple shares every quarter.

Apple Q2 Earnings scheduled 1^st May (AMC)

Revenue consensus: $61.06bn, up 15.5%

EPS consensus: $2.70, up 28.6%