Big Tech Q1 preview: Earnings season will test valuations
Joshua Warner April 21, 2022 2:26 AM
While Big Tech has enjoyed success as a group for many years, we are likely to see a bigger divergence in performance in 2022.
Big Tech Q1 2022 earnings calendar
We enter the peak of the US earnings season next week, with Big Tech stocks dominating the corporate calendar.
Microsoft and Alphabet kick things off with earnings due out on Tuesday April 26, Meta follows on Wednesday April 27, with Apple and Amazon rounding things off on Thursday April 28.
Big Tech: What to expect from this earnings season
Big Tech stocks have come under pressure since the start of 2022 as concerns about the growth outlook has weighed on valuations that exploded during the pandemic. This earnings season will be a major test and see some earn their bumper valuations while others could suffer if they are starting to struggle in the current environment.
There is no shortage in headwinds facing Big Tech in 2022 but inflation and supply chain headwinds are the two major themes this earnings season. Costs are rising across the board and the level of success Big Tech sees this week will partly depend on their ability to pass this on to customers in the form of higher prices without curtailing demand for their products and services as consumers cut their spending as the price of everything from fuel to food continues to rise. Meanwhile, supply chains remain constrained by shortages of key components such as semiconductor chips while some are suffering as key tech hubs in China experience fresh disruption from Covid-19.
Big Tech has long been able to impress markets with rapid top-line growth, but attention is switching to those that can deliver reliable earnings and resilient margins during tougher times for the global economy.
Investors have previously been able to apply a broad-brush approach to Big Tech, but this has unravelled in recent months and they now need to be more selective in what they are trading and pay more attention to the fundamentals for each company. We have already seen Meta fall from grace after user growth stalled and ad revenue came under pressure earlier this year, and another reliable growth stock often named alongside Big Tech – Netflix – has also wiped-out all the gains booked in recent years after losing subscribers for the first time in over a decade.
Will demand for Apple’s iPhones or Amazon’s ecommerce growth suffer as consumers tighten their belts amid the cost-of-living crisis? How will businesses adjust their advertising budgets on platforms run by Meta and Alphabet? Will demand for cloud-computing and gaming hold-up at Microsoft? How will the conflict in Ukraine hit supply chains and the withdrawal from Russia impact bottom lines? Which stocks will prove most exposed to the fresh Covid-19 outbreaks in China?
While Big Tech has enjoyed success as a group for many years, we are likely to see a bigger divergence in performance in 2022. Current consensus figures suggest Microsoft (18.8%) and Apple (9.6%) will deliver the most impressive growth in annual EPS this year while pointing toward more tepid growth from Alphabet (3.5%), Amazon (2.4%) and Meta (0.9%). It is worth noting that all of them will be coming up against some tough comparatives from 2021, when many celebrated record revenues and earnings.
Let’s have a look at what to expect for each individual company this earnings season. All forecasted growth figures are on a year-on-year basis and taken from consensus figures compiled by Bloomberg.
Wall Street forecasts Microsoft will report an 18% rise in revenue in the third quarter of its financial year to $49.1 billion and post a 12% increase in diluted EPS to $2.19.
Microsoft said in its last quarterly update that it expected its ‘differentiated market position, customer demand for our high-value hybrid and cloud offerings, and consistent execution to drive another strong quarter of revenue growth.’
Its cloud-computing division is expected to remain the main driver of growth as more businesses digitise their businesses with analysts looking for a 25% rise in revenue. Its Productivity & Business Processes unit that homes its Office software, Dynamics 365 and LinkedIn is expected to see its topline rise 16%. That will be the slowest growth seen in a year and investors will be wary that demand for software and premium job-hunting plans could wane as people tighten their purse-strings this year. Its smallest division that sells Microsoft’s hardware such as computers and Xbox gaming consoles is forecast to see sales continue to rise by 9.9% despite the ongoing chip shortage.
Microsoft shares have underperformed compared to Big Tech rivals Alphabet, Apple and Amazon since the heavy selloff started in 2022 – but analysts believe it will deliver significantly faster earnings growth than all its peers this year.
The 50 brokers that cover Microsoft remain bullish on its prospects with an average Buy rating and a target price of $368, some 28% above the current share price.
Wall Street expects Alphabet to report a 23% increase in revenue in the first quarter of 2022 to $68.1 billion and over a 20% rise in diluted EPS to $25.99.
Alphabet makes the bulk of its income from advertising on Google and YouTube and while there has been a marked slowdown in spending on some social media platforms like Meta, the company has so far proven to be more immune to the headwinds and continued to deliver strong growth thanks to its more diversified business model and ability to navigate the privacy changes introduced by Apple last year which has played havoc with social media platform’s ability to target ads and track user’s online behaviour. Google Services is forecast to grow revenue by over 22% in the first quarter, although that will still mark the slowest pace seen in over a year.
Google Cloud is still a relatively small player in the cloud-computing market, but it is the fastest-growing part of Alphabet’s business, with analysts forecasting revenue will soar 42% in the quarter despite coming up against tough comparatives from last year. The main challenge with its cloud venture is improving profitability considering margins remain poor compared to rivals Amazon Web Services and Microsoft Azure.
The 52 brokers that cover Alphabet are bullish on the stock and believe it can rise over 35% in the next 12 months with an average target price of $3,460.
Wall Street forecasts Meta will have delivered 8.1% growth in revenue in the first three months of the year to $28.3 billion but see diluted EPS come under pressure and drop for a second consecutive quarter to $3.21, down 2.7% from the year before.
Meta has already seen its shares collapse 39% since the start of 2022. That was the result of its last set of quarterly results disappointing the market and revealing daily active users fell sequentially for the first time. That was blamed on the privacy changes introduced by Apple last year – with the company having already warned this will cost it some $10 billion in 2022 as a whole - as well as more intense competition with the likes of TikTok. This caused it to warn that growth will deaccelerate even more in the first quarter of 2022.
The company made a lot of noise when it changed its name and announced its pivot toward virtual reality and the metaverse, but markets are rightly wary that the current business that is based on advertising and user engagement is waning and that its new ventures will not be profitable any time soon and remain a major drag on earnings, with Meta’s new Reality Labs unit reporting a hefty $10 billion loss in 2021.
Meta is expected to struggle the most out of Big Tech stocks in 2022 in terms of earnings growth. Still, the 63 brokers that cover Meta believe the heavy selloff has been overdone this year and see over 59% potential upside with an average target price of $319.
Wall Street is expecting Apple to report 5% growth in revenue to $94.1 billion when it releases results covering the second quarter of its financial year this week, with diluted EPS forecast to inch 1.8% higher to $1.42.
Sales of products spanning iPhones to Mac computers is expected to rise 4.3% to $75.8 billion, marking the fifth consecutive quarter of slower growth as it continues to come up against tough comparatives.
Meanwhile, analysts have set Apple a tall order and are expecting its services revenue to rise over 17% to $19.8 billion. Bloomberg Intelligence has flagged that data from Sensor Tower suggests there was a just a 6% increase in net revenue from all applications in the period and that could weigh on the one-third of income derived from this source, while some will also be nervous about how subscription services are faring following the poor performance delivered by Netflix.
Apple has proven to be among the most resilient despite supply chain problems that have plagued the industry, having continued to deliver record results in the last quarter. However, fresh Covid-19 outbreaks in China will have undoubtedly caused some fresh disruption for the company.
On a brighter note, some analysts have suggested Apple could leverage its $200 billion in gross cash ($80 billion net) to accelerate its buyback programme this year, which in turn would help boost EPS and its share price by reducing the number of shares in issue and help counter any weakness in earnings growth this year.
The 46 brokers that cover Apple believe the stock can climb to fresh all-time highs over the next 12 months with an average target price of $193, over 15% higher than current levels.
Wall Street forecasts Amazon will report a 7.3% rise in net sales in the first quarter to $116.4 billion and see diluted EPS sink over 46% to $8.51.
Amazon’s ecommerce business will be coming up against some tough comparatives from last year, when it reaped the benefits as consumers shopped online during the pandemic. Product revenue is expected to suffer its first year-on-year fall in years, while services revenue growth is forecast to slow for a fourth consecutive quarter to 16.6%.
Amazon is likely to be among those to struggle the most to pass on rising costs for everything from labour to logistics to consumers, but it also boasts the ability to absorb any contraction in profitability by leaning on its higher-margin services business offering cloud-computing services, online advertising and subscriptions. Amazon Web Services remains the jewel in the crown and boasts the strongest fundamentals across the business as demand for cloud-computing is not expected to suffer despite the uncertain economic outlook, but the rest of the business could be vulnerable to rising costs and any slowdown in consumer spending.
The 59 brokers that cover Amazon believe there is over 31% potential upside from current levels with an average target price of $4,045, which is also well above the $3,675 all-time high hit last year.
How to trade Big Tech stocks
You can trade Big Tech stocks with Forex.com in just four steps:
- Open a Forex.com account, or log-in if you’re already a customer.
- Search for the stock you want in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Or you can try out your trading strategy risk-free by signing up for our Demo Account.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.