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Breaking Down Big Tech Revenue

ProDentim

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The market’s mixed reactions to the first quarter results of four of the “Big 5 Tech Players” – Amazon AMZN, Alphabet GOOGL, Meta META and Microsoft MSFT – give us a window into what market participants consider essential for these actions to maintain their recent price momentum. . Apple AAPL to release first quarter results on Thursday, May 4e.

All of these stocks have been great performers in 2023, as you can see in the chart below which shows their year-to-date performance against the S&P 500 Index (bottom red line, up + 8.3%).

Image source: Zacks Investment Research

As you can see from this chart, Meta Platforms shares were in a league of their own when it came to stock market performance, which got a further boost after the first quarter results. The magnitude of the positive reaction to Microsoft’s results was not as strong as it was for Meta, but it was still very supportive. Shares of Amazon and Alphabet lost ground after their quarterly releases, although they both beat estimates.

The main differentiator between Amazon, Microsoft, and Alphabet are the trends in their respective cloud businesses and the perceived progress each is making on the artificial intelligence (AI) front.

The market likes what it sees and hears from Microsoft on both fronts and seems somewhat skeptical of Alphabet and Amazon’s AI efforts. We all know cloud spending is declining, but Microsoft is not only seen as gaining market share from Amazon Web Services, but is also seen as benefiting from growth driven by its AI capabilities.

Considering the “Big 5 Tech Players” as a whole, combining Apple’s estimates with the actual results of others who have already reported, the group’s total first-quarter earnings are expected to fall by -2.5% on revenues up +3.8%. That’s significantly better than the -11.2% drop in profits on a +1.9% rise in revenue expected just a week before these results.

Zacks Investment Research
Image source: Zacks Investment Research

A better-than-expected performance from Apple this week, which is expected to lead to a -9.1% decline in first-quarter profits on revenues down -4.1%, could potentially push the group’s growth rate into territory. positive.

The graph above shows that the group’s growth should improve, even if it will take a few more quarters before certain macroeconomic uncertainties are lifted.

The chart below shows the group’s profit and revenue growth on an annual basis.

Zacks Investment Research
Image source: Zacks Investment Research

With revenue growth hard to come by due to macroeconomic factors, the group responded to lingering market concerns about cost control by announcing payroll cuts. There is a general feeling in the market that all could do more on this front, but their moves are nonetheless helping stabilize their margins.

Group net margins declined -458 basis points in 2022, but are expected to increase slightly in 2023 and improve further in 2024. That said, current net margins embedded in consensus estimates for the next two years remain below the 2021 level. That said, the 2023 net margin estimate of 18% for the group is higher than the pre-Covid 2019 level of 17.6%.

Looking beyond the big five in tech, total first-quarter earnings for the tech sector as a whole are expected to be down -13.2% from the same period last year, with revenue down -3.6%.

The chart below shows the industry’s first quarter earnings and revenue growth forecast in the context of growth over the past few quarters and what is expected for the next four periods.

Zacks Investment Research
Image source: Zacks Investment Research

This overview of the Big 5 players and the industry as a whole highlights the ongoing challenge of earnings growth. But as you can see below, the Tech space is expected to resume its growth engine status from next year.

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Image source: Zacks Investment Research

Q1 Earnings Season Dashboard

Including all quarterly reports published until Friday 28 Aprile, we now have the first quarter earnings of 267 S&P 500 members, or 53.4% ​​of the total number of index members. Total profits for these companies were down -2.4% from the same period last year on revenues up +4.1%, with 77.2% beating EPS estimates and 73% income estimates. The proportion of these companies exceeding both EPS and revenue estimates is 59.9%.

Regular readers of our earnings commentary will know that we rated the overall picture for the first quarter earnings season as quite good; not great, but not bad either. With results for more than half of the S&P 500 members already released, we can confidently say that corporate earnings are not headed for the “precipice” that market bears were warning us about.

From our perspective, the “better than feared” view of Q1 earnings season at this point may be a little unfair, given the resilience of corporate profitability. But the view isn’t completely off the mark either.

We have a very heavy reporting package this week, with nearly 1,150 companies reporting first quarter results, including 159 members of the S&P 500. In addition to the aforementioned earnings release from Apple, this week’s package includes a representation of all sectors of the economy.

Below, we compare the first quarter results to what we’ve seen from this same group of 90 index members in other recent periods.

The first set of charts compares the earnings and revenue growth rates of the 90 index members that reported with what we had seen of the group in other recent quarters.

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Image source: Zacks Investment Research

The comparison charts below put Q1 EPS and revenue percentages in historical context.

Zacks Investment Research
Image source: Zacks Investment Research

The overview of benefits

To get an idea of ​​what is currently expected, take a look at the chart below which shows the current earnings and revenue growth forecasts for the S&P 500 Index for the first quarter of 2023 and the following three quarters.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see here, Q1 2023 earnings are expected to be down -5.7% on revenue up +2.8%. This would follow earnings down -5.4% in the prior period (Q4 2022) on revenues up +5.9%.

These earnings and revenue growth projections for the first quarter of 2023 include the expectation of continued margin pressures, a recurring theme in recent quarters. The chart below shows the year-over-year change in net profit margins for the S&P 500 Index.

Zacks Investment Research
Image source: Zacks Investment Research

The actual results turn out to be much better on the margin front compared to what was expected prior to the releases.

Estimates for the first quarter declined at the start of the quarter, consistent with the trend in place since the start of 2022. That said, the magnitude of the negative revisions to the first quarter estimates was smaller compared to what we had seen. in the previous two. periods.

The estimates for the year 2023 are also down, as we regularly point out in these pages.

The chart below shows profit and revenue growth on an annual basis.

Zacks Investment Research
Image source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for future periods, please see our weekly earnings trend report >>>> 2023 Q1 Earnings: Good Enough, but not great

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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