The past week brought an onslaught of earnings reports from the titans of the market, and the results did not disappoint. Five of the tech giants, known as the ‘Magnificent 7’, unveiled their financial performance, leaving investors in a frenzy for the latest scoop.
On Tuesday, tech stalwarts Microsoft and Alphabet went head-to-head and were then followed by Amazon, Apple, and Meta Platforms on Thursday afternoon, each taking their turn in the earnings spotlight.
Winning Earnings
All these market leaders have displayed exceptional stock performance over the last 18 months, hinting at a possible continuation of this trend. In this analysis, we delve into the quarterly earnings reports, valuations, and Zacks Ranks, aiming to pinpoint the most appealing investment opportunity at present.
Image Source: Zacks Investment Research
Earnings Highlights
Microsoft: In Q2 2024, Microsoft outperformed expectations with an 18% surge in revenue and a striking 33% jump in EPS. The strong showing was powered by its cloud product, Azure, which experienced a 30% uptick and doubled its AI integration. Despite a slightly lower Q3 revenue forecast, Microsoft maintains a Zacks Rank #2 (Buy), backed by its thriving cloud business and unwavering commitment to AI advancements.
Alphabet: While Q4 2023 earnings marginally exceeded EPS estimates, ad revenue fell short of expectations, leading to a dip in stock price despite a notable 14% YoY sales growth. The resilient cloud business contrasts with concerns about the core advertising engine. Holding a Zacks Rank 3 (Hold), Alphabet may appear less enticing based on earnings estimate trends.
Amazon: Earnings for Q4 2023 surpassed estimates on both revenue and EPS fronts, generating positive investor sentiment. AWS, the company’s cloud computing arm, remains a major growth driver, and advertising revenue outperformed expectations. This buoyant report resulted in a hike in stock price and reinforced Amazon’s Zacks Rank #2 (Buy) rating.
Apple: Apple’s Q1 2024 earnings beat analyst expectations for both revenue and EPS, evidencing a 2% YoY revenue increase to $119.6 billion and a 16% YoY EPS surge to $2.18. Although iPhone sales narrowly missed their mark, Services revenue soared to an all-time high, signaling a shift towards recurring income streams. The company achieved a record number of active devices, securing a Zacks Rank #3 (Hold).
Meta Platforms: Q4 2023 earnings surpassed expectations, propelling a 20% surge in stock price. Both revenue and EPS exceeded analyst estimates, with revenue growing 25% YoY. The announcement of Meta’s debut quarterly dividend and a $50 billion stock buyback further stoked investor enthusiasm. Continued investments in the metaverse and ongoing profitability concerns didn’t dilute the company’s appeal, maintaining a Zacks Rank #2 (Buy) rating.
Valuations
The forward earnings multiples of each stock discussed are outlined in the chart below. Notably, GOOGL and META boast the lowest multiples, around 20x, while AMZN commands the highest at 43.5x. AAPL and MSFT are positioned in the middle of this spectrum with 28.4x and 36.2x respectively.
It’s worth observing that AMZN, META, and GOOGL all trade below their 10-year median valuations, whereas AAPL and MSFT surpass these benchmarks.
Image Source: Zacks Investment Research
Final Thoughts
After a thorough analysis, Meta Platforms and Amazon appear to exhibit the most potential for significant growth in the near future. Amazon’s progress is particularly striking, with AWS maintaining a 20% growth rate, and their nascent advertising sector witnessing a 23% annual expansion, hitting a sudden $60 billion in annual sales.
The success in advertising is especially noteworthy when compared to Alphabet, the dominant online ad platform, whose growth is markedly decelerating.
Meta Platforms too continues to captivate with its 250% rally over the past 18 months, yet still maintains a compelling earnings multiple. With the recent announcement of a $50 billion buyback plan and a new dividend, it underscores a firm dedication to rewarding shareholders.
Alphabet, despite bearing worrisome growth data regarding its ad business, perseveres. While not the most promising in terms of growth prospects, it presents an appealing investment proposition as the most economical among the Magnificent 7.
Big Tech Companies Continue to Thrive Amidst Valuation Concerns
Big Tech Continues to Impress
Despite recent concerns about premium valuations and slowing sales growth, big tech companies such as Amazon, Apple, Microsoft, Alphabet, and Meta Platforms have continued to thrive, showcasing their resilience even at their mammoth sizes. This continued success is a testament both to their adaptability and to the enduring health of the US economy.
Challenges and Valuation Concerns
It is acknowledged that the astronomical valuations of these tech giants may present challenges for investors, particularly in the face of slowing iPhone sales growth for Apple and concerns that Microsoft’s anticipated future news may already be priced into the market.
Market Impact
These industry leaders are making significant impacts, and though some may falter, the ability of these giants to withstand market forces is a reassurance to investors, even in the face of challenges. Their continued success also provides a positive reflection on the broader health of the US economy, serving as a beacon of hope for market stability.