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Big Tech Disappoints Investors on Earnings Calls

Big Tech Disappoints Investors on Earnings Calls

The tech and internet sectors are frequently the highlight of most earnings seasons, and they rarely disappoint. Over the past decade, sizzling growth by the pivotal tech sector (NYSEARCA:XLK) has supercharged the entire market, with the sector now representing 28% of the S&P 500, more than twice the size of the next biggest sector,  consumer discretionary (NYSEARCA:XLY).

But the tables have lately turned, with the tech boom hitting the skids while the energy sector (NYSEARCA:XLE), a perennial laggard, has emerged as the class valedictorian.

Last week, we warned that Netflix Inc.’s (NASDAQ:NFLX) Q1 stinker was likely a harbinger of things to come from the fabled FAANG group of companies--and so far we have been vindicated.

Tech heavyweights Apple Inc. (NASDAQ:AAPL) and Amazon Inc. (NASDAQ:AMZN) returned solid Q1 2022 scorecards on Wednesday where the companies posted mixed results and issued worrying guidance, leading to the stocks getting hammered.

Supply Constraints

Apple reported Q2 GAAP EPS of $1.52, $0.09 better than the Wall Street consensus while revenue of $97.3B (+8.6% Y/Y) beat by $3.31B.

Revenue attributed to the iPhone came in at $50.57 billion, up from $47.9 billion in the year-ago period, due to strong demand for the iPhone 13 lineup. Mac sales came in at $10.4 billion, while revenue attributed to the iPad and its Services division came in at $7.6 billion and $19.8 billion, respectively. Wearable revenue, which includes the Apple Watch and AirPods, came in at $8.8 billion, up from $7.8 billion in the year-ago period.

Apple also announced that it will hike its buyback program by $90 billion and boost its quarterly dividend by 5% to 23 cents per share.

Apple, however, gave a heads up that spooked investors: the Cupertino giant said that events like the China COVID-lockdowns and chip constraints would impact next quarter's revenue by between $4 billion and $8 billion, though analysts were quick to note demand for its products and services is still strong.

Apple CEO Tim Cook added that COVID-related disruptions in China are an issue for Apple (AAPL), particularly in Shanghai, but there is "some reason for optimism" that the situation may not be as bad as feared, as factories have opened and production starts to ramp up again.

Despite the reassurance, AAPL shares fell nearly 5% in the aftermarket. The fact that Apple failed to provide a forecast for the current quarter also contributed to the uncertainty, which is something investors hate.

Slowing Growth

Unlike Apple, Amazon Inc.’s (NASDAQ:AMZN) posted mixed results and also issued a bleak forecast.

The  eCommerce behemoth posted Q1 2022 revenue of $116.44B (+7.3% Y/Y), in-line with the Wall Street consensus but missed wildly on the bottomline after reporting Q1 GAAP EPS of -$7.56, a good $15.78 below Wall Street’s expectations.

Amazon’s cloud-computing platform Amazon Web Services (AWS) was a bright spot during a lackluster quarter, but still failed to offset weakness in the company's core retail business.

Amazon’s net sales clocked in at $116.4 billion, compared to analysts' expectations of $116.43 billion. That figure marked a revenue increase of 7%, compared to a 44% increase in the same period last year, marking the company's slowest growth rate in more than two decades.

The tech giant also reported a net loss of $3.8 billion in the first quarter, or $7.56 per share, compared Bloomberg to estimates of earnings per share of $8.40. That compares poorly with net income of $8.1 billion, or $15.79 per share, that Amazon logged in last year’s comparable quarter. Amazon attributed its hefty loss to a pre-tax valuation loss of $7.6 billion from its investment in Rivian Automotive, Inc. (NASDAQ:RIVN).

Like other companies this reporting season, Amazon also attributed much of its challenges to macroeconomic headwinds from war in Eastern Europe, persisting supply chain, and rising costs associated with decades-high inflation levels. 

Amazon’s guidance proved to be another weak spot: looking ahead, Amazon says it expects Q2 revenue of $116B to $121B, well below Wall Street’s estimate of $125.1B and operating income of -$1.0B to +$3.0B, a rather unusually wide range.

As you might expect, AMZN has been hit even harder than AAPL, with the shares down 12.7% in early intraday trading on Friday.

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