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Making Markets EP34: Big Tech Outperforms, Amazon’s Surprise Loss, What This Quarter’s Results Mean
by Daniel Newman | May 2, 2022

In this episode of Making Markets, host Daniel Newman explores a big week of tech earnings as the biggest names including Microsoft, Apple, Amazon, Meta, and Alphabet all reported. Others including Intel, Qualcomm, and other big tech names followed as well. What do the results say about the economy and, if any red flags emerged, what lies ahead for tech and markets?

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Disclaimer: The Making Markets podcast is for information and entertainment purposes only. Over the course of this podcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such. 

Transcript:

Daniel Newman: A massive week for tech with a slate of earnings that included Amazon, Apple, Meta, Alphabet and Microsoft. While the results were mixed, there were some good signs. However, the market capitulated under the weight of a hawkish Fed trying to stomp inflation, taking stocks down with it. Also, we look at chip makers Intel and Qualcomm, which reported along with enterprise technology growth companies like ServiceNow and Five9. A look at this week’s results, the markets, and a dive into what it all means. All this and more, you’re tuned in to Making Markets.

Announcer: This is the Making Markets podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation and the company’s featured on the show. The making markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey everybody. Welcome back to Making Markets, episode 34. The time flies, hope you are having a great week. Recording this on a Friday. Not sure what day it is that you’re going to be listening to this, but always appreciate y’all tuning in. What a really busy week in technology. A couple weeks ago, TSMC reported its earnings. I said, semiconductors are going to do well. It was just a great leading indicator so far this week. Qualcomm, great numbers, Intel, solid, although the guidance is still leaving something to be desired from the street. But, that’s the side show, was the semiconductors. This week was all about big tech. So, let’s talk about that, and then maybe I’ll come back to the semiconductor stuff a little bit later in the show, because I think people do care, and there’s a lot of implications around big tech. And, also going to go around the wagon, maybe hit on a couple other companies that posted this week that I was paying attention to, ServiceNow, Five9. Let’s start with the megas.

So, Microsoft had a terrific result this week. I’m not sure how many of you would’ve missed that. But, a lot of people coming into this earnings were wondering with the macroeconomics, getting tougher inflation, still high, interest rates on the rise. Where’s is tech going to go next? We’ve already seen a lot of valuations across the industry come down a lot, but Microsoft, I believe, is really insulated. And, despite the fact that the price has fallen over the last several weeks, the performance of the company was terrific. About 18% growth in this quarter. It slowed growth, believe it or not, but still record top line, strong bottom line, beat on earnings, beat on revenue, had 46% growth of its Azure business, had growth in the dynamics, CRM. had solid growth in its new Viva product, which is for workforce management teams, continues to rally. Surface was up, gaming was up, the company was firing on all cylinders. And, the security business is absolutely exploding right now, which people haven’t even paid a lot of attention to, but in a world where security’s going to continue to be more important, the company also performed really well in that space.

But, Microsoft is… when I talked to Emily Chang, I was on Bloomberg this week, and when I talked to her about it, she asked me the question, “Are they insulated?” And, I think the long and short is, if my thesis, and several other people’s thesis, about the deflationary aspects of tech are true, that Microsoft may be in one of the best positions of all the companies. Enterprise tech, cloud, AI, data services, automation, security, these are going to be things that companies are going to invest in to actually put them in a better position to deal with a sustained potential recessionary, or stagnant market that we are looking at. Because, remember, GDP this week actually lent negative, to many people’s surprise. But, overall, started off with Microsoft, very good result for the company.

Now, on the same day as Microsoft reported, Alphabet also reported. Unlike Microsoft, Alphabet didn’t beat on top and bottom. They did have a good revenue number and their earnings didn’t miss by much. Basically, the pressure of Russia, and what’s going on over in the Ukraine, had a bit of a snag on the YouTube number, that seemed to be enough to pull down the revenue, and actually pulled down the earnings, that led the company to a miss. But, the Alphabet numbers, as a whole, the advertising business is strong, it’s very profitable, it’s growing. I’m just not that worried about it. I think the company’s pretty robust, and I think it doesn’t have a ton of exposure to the IDFA from Apple, which has completely sidetracked Meta, despite the fact that Meta had a bit of a comeback this [inaudible].

On another note, something to watch when it comes to Alphabet has been its cloud business. Now, it’s cloud business had a nice 40% year on year growth, but it’s still losing about a billion dollars this quarter. They’re investing, they’re expanding infrastructure. I think that cloud business is going to be important, it’s going to help scale, and it’s going to diversify that core advertising space for the company. But, at the same time, it’s still not generating profit, which is something I think needs to be given some attention to. But, given the diversification, perhaps it’s okay in the longer term for the company to invest, scale out its data centers, put the big money behind the sales engine, grow the business. I know it’s not looking to be on par with a third or fourth place in the cloud game, it wants to be up there with Amazon, and AWS, and Azure with Microsoft.

So, that’s kind of the plan there, but Alphabet, overall, had a pretty strong result. I think the market’s reaction is that it’s been so perfect for so long, and that the headwinds, the macro environment is just discounting growth to some extent. And, Alphabet fell a little bit to that. But, don’t be surprised with a bounce back, especially with that $70 billion buyback that was announced. Meta was talked about a ton. I’m going to skip past that one, because I want to take my time here to talk a little bit about Amazon, and, I want to talk about Apple for a minute, and then I want to talk a little bit about semiconductors. But, Amazon absolutely got crushed for its result this quarter.

Now, I think on a [inaudible] earnings level, there’s not a whole lot of debate there. Company fell short, it missed its targets on revenue, and it badly missed its targets on earnings. Now, having said that, the earnings number was a little misleading, because about half the loss. Now, again, this is a company that just had its growth, as slow as it’s been, in over a decade, I think maybe since its inception actually, and it did show a loss after many quarters consecutively, a very strong bottom line results.

Its investment in Rivian contributed almost half of those losses, though. So, while it was supposed to be around $8 a share positive, and ended up some an $8 negative, it was about break-even if you take out the Rivian investment. And, the Rivian investment’s one of those things that, right now, that is what it’s worth, but in the future it could come back. [inaudible] not done, stock price changes every single day. So, that was kind of interesting.

What I think is really worth noting about the Amazon price, and result, and the market, and the reaction, it does trade at a bit higher premium, and it does have that big split coming up than, say, Alphabet or Microsoft, Apple do. So, that is something that I think the market’s probably thinking about. It was closer to 50 times before earnings reported, whereas the others are in the 25 to 30 range. Now, at the same time, Amazon was arguably one of the biggest beneficiaries of the pandemic. It’s e-commerce business grew exponentially, it’s fulfillment centers exploded. They were operating at close to 100% capacity for a very long period of time. And, the market hasn’t quite known how to adjust for the fact that some of that growth was pull forward growth. It knew it was growing faster because of what was going on in the macro with the pandemic.

And so, as it slows down even a little bit, you see some shopping go back to retail, you see mobility up higher, you see people traveling, you see less online ordering. And, we also got a bunch of other factors. You got supply chain issues, that’s bringing up higher costs, the ability to adjust costs on the fly to deal with these ongoing supply chains, things like the shutdown that is taking place in China for Covid, can’t necessarily be adapted for in the quarter. You also have a pretty tight labor market, and Amazon has had to push costs up, and try to staff, they’ve done a lot of hiring. I think some of that hiring was probably pulled forward. They’re going to be able to slow down the growth of expense from hiring. And then, the company also spent a lot of money on the innovation of next-day and same-day delivery. That’s expensive, and it’s expensive to implement, but it is world class, and it has helped the company become the biggest e-commerce company on the planet.

And so, that’s a bunch of different factors, but I think the biggest one is we saw a lot of pull forward, we’re starting to see normalization, the market is tightening a little bit. Amazon growth slowing down really shouldn’t surprise anyone. On a really positive note, the AWS cloud business had a really explosive quarter again, growing in the thirties percent, the mid-30 percentage points. And, this is the company that’s doing $16 billion-plus dollars per quarter, the largest public hyperscale cloud company, not growing quite as fast as Azure or Google at this point, but has a significant lead in the overall revenue.

And so, still number one, still a great generator for the company, and did have a really good performance. And, that was a big, bright spot for the company. There were some other bright spots in retail, in advertising. I think, you know what they’ve done recently with buy with prime, that’s going to get diversified across the web, it’s going to create more recurring revenue for the company, it’s going to enable its sellers. Amazon’s going to definitely see some pullback based on this conditions, but I do see in the longer term it’s going to get right-sized, and start scaling once again. And I think, we don’t have to worry too much in the long term. I think Amazon is going to be okay.

Now, just quickly want to touch on Apple. Apple had a really interesting performance, and by interesting, I mean it was good. It was actually really good. Having said that, despite the fact that it was really good, the market didn’t necessarily love it. And the long and short with that was, the company basically said that there might be some slow down in revenue due to issues with supply chain. They’re saying like something like $4-8 billion, potentially, pullback the next quarter. But, just running down results, if you just do the quick breakdown, iPhone revenue, up 5%, beat significantly 50 billion verse 47. You look at Mac revenue beat, you look at iPad revenue beat. You look at the margin was up over all revenue beat. And the earnings beat. So, the last two quarters, Apple has been consistently saying that this supply chain could be a problem, it could be several billion. And, I think the market reacts to that, but then they come in and they perform really well.

And then, like I said, they initiated a really significant buyback in the range of about $90 billion. And those buybacks, of course, it’s like daring the market to sell. They sell, Apple’s ready to gobble up the shares if they think there’s a value here, and the price is low, and it should be higher. That’s really what the buybacks mean. But, I tend to think, I’m not going to say they’re sandbagging, I’m just going to say that I think Apple is conservative. They don’t give guidance. They tend to give signal, and their signal is, there could be some slowdown, but nothing to indicate significant slowdown.

So, let’s pivot over real quick to talk about, first of all, Qualcomm. Qualcomm had an absolute bang-up quarter. Just a terrific result for the company. 11.2 billion, 41% growth. They were above expectations top and bottom line, handset growth is huge, big announcements with Samsung, the company’s $16 billion automotive pipeline. They’ve now got three different businesses generating around $5 billion a year-plus in run rate. Of course, handsets well beyond that. The automotive business is growing. It’s now about two and a half times the size of Invidia’s automotive business. They’ve got some big customer wins in that space, that’s been really important for the company. The Apple loss risk factor is getting less and less with each passing quarter. The company’s guiding forward for strength, it’s saying supply is still tough, but they’re going to be able to handle it. But the demand is so good, they really do expect it to continue going forward on a very positive basis. The licensing business was good. There really wasn’t anything bad in the Qualcomm report. And so, that might have been the winner of the week. It was right up there with Microsoft for having some of the best results.

Now, flipping over to Intel. Intel had, actually, a better quarter than I think people expected. They beat on the top line. They beat on the bottom line, but their guidance seems to be a bit of a hold back for the company. It actually maintained its guidance, actually slightly improved it. Their margins were a little better, guided a little bit better, but it is a longer term story for the company. I just don’t think that Intel is currently in a position where the market feels it’s ready. But, I do think that its data center business, its network business, its Foundry business, pretty much everything but it’s PC business is doing quite well. They need to build up these fabs, they need to get this foundry business launched, and they need to show that everything that Pat Gelsinger’s saying is going to be executed upon.

But, I actually feel that the company did better than what the market is deeming. But, at the same time, guidance right now is in focus, and if a company’s guiding a little soft, the market is probably not going to be that confident. Over the next several years, though, I do tend to believe that we’re going to start to see a lot of this aggressive investment and execution that’s being made by Intel start to pay off. And, of course, if the policy shift in any way with the chips act pushes more manufacturing here in the US, I do believe Intel is in really good shape because of that. So, that was where things left with the semiconductor space, but both beat. So, the two big chip companies, they both beat this quarter.

Guidance is, again, the discerning factor, but they maintained at Intel. They actually have very strong next quarter guidance that came out of Qualcomm. A lot to like there, despite this macro economic negativity sentiment towards chip companies, tech companies. Another two companies that just have bang up numbers, I’m only going to spend a second on as I wrap the show, but ServiceNow, 29% growth, huge revenue growth, huge subscription growth, 98% renewal rates, beat on top, beat on bottom, absolute deflationary tech play here. You’re talking about a company that automates workflows. If you want a technology that’s going to be critical for a tighter economy, I really do think ServiceNow has that kind of scale of their platform, means more extensible, they’re competing in new spaces. They’ve got, seemingly, places for growth. And they’re winning customers at the top end of the market. They had a big jump in customers spending seven figures-plus with the company.

So, that was something that I thought was definitely noteworthy. Another one that I thought had a good result that is worth pointing out was Five9. This is the contact center, collaboration space. Communications, moving that business to the cloud, CEO Rowan Trollope, who’ll be with me next week, so I’m not going to dig in too much to that here. But, they had 33% record revenue. This was a company that was going to be acquired by Zoom, but now is going at it alone. It had 46% growth in their enterprise subscription business, they increased their operating cash flow. I like all those things about the business, but I like the fact that it’s born on cloud, it’s highly scalable, they’re definitely meeting a need right now, which is all about customer experience, contact center extensibility, software subscription, ARR.

And, again, they’re going at it alone. After that Zoom deal fell apart, I think some people wondered what’s going to happen to Zoom. But, the company has not only hung in there, but is showing record results. And so, good on them, good on ServiceNow. But, overall, the week in tech was really pretty good. Even Meta, where most people had thought Meta was going to have a really bad quarter, including me, they hung in there pretty well, Five9 all the macro factors, the IDFA, Russia, and just the fact that the stock had absolutely been abominated last several months. People have just been running scared. Had a nice comeback as a result of its result.

So, good quarter, big tech moving pretty well. Netflix, not part of the story anymore, said that last week. Still not part of the story now. But, Apple, Alphabet, solid. Amazon was a bit of a dark spot, but I do believe they’ll turn the quarter next quarter. For this week, for this episode though, I got to go and say goodbye. Thanks for tuning in to Making Markets.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio