Apple and Amazon surprise, Meta disappoints

August 3 2022

The biggest earnings week of the quarter saw the big tech companies Apple (AAPL) and Amazon (AMZN) post quarterly results that were better than expected. But Facebook-parent Meta (META) failed to keep up with market expectations. This report looks at what worked for these tech giants and what did not and what the road ahead looks like for these companies.

Apple posts record quarterly revenues despite ongoing headwinds

Apple, last week, reported record revenues for its third quarter ended 25 June 2022. The company’s quarterly results beat Wall Street’s expectations both on revenues and profits. Revenues came in at $82.96 billion as against $81.43 billion reported a year ago. Apple has been able to post record revenues at a time when supply chain constraints, COVID-induced lockdowns in China, and higher inflation numbers are dragging down revenues of many big tech companies.

Key earnings highlights for the quarter

Revenues: $82.96 billion (reported) vs. $82.81 billion (expected), up 2% year-on-year
Earnings per share: $1.20 (reported) vs. $1.16 (expected)
Gross margins: 43.26% (reported) vs. 42.61% (expected)

Solid iPhone sales and services business boost quarterly revenue

Apple’s total revenue grew 2% during the June quarter as compared to the 8% growth seen during the March quarter. The management expressed that the results were better-than-expected as the company faced a challenging operating environment in the June quarter. iPhone revenues for the quarter came in at $40.67 billion, higher than analyst estimates of $38.33 billion. However, Apple’s other product categories like Macs, iPads and wearables/accessories saw a year-on-year revenue decline in the same period.

iPhone revenue: $40.67 billion (reported) vs. $38.33 billion (expected), up 3% year-on-year
Services revenue: $19.60 billion (reported) vs. $19.70 billion (estimates), up 12% year-on-year.

Exhibit 1: Apple’s Segment-wise Revenues (in $ billion)

Source: Company Financials, July 2022

Apple’s services segment includes iCloud storage, Apple Pay, App Store revenue, Apple Music and warranties. The company has been banking on this unit to fuel future growth as the smartphone business reaches saturation. But the 12% year-on-year revenue increase is the slowest growth rate since the fourth quarter of 2015 for the services unit. In fact, the services business faces various challenges from a strong U.S. dollar and rising inflation during the September quarter.

Apple reports strong revenues across all regions in a challenging environment

Despite COVID-related challenges and geopolitical crisis in Europe hampering both supply and demand; Apple managed to report strong revenues across all regions. The company does not provide a country-wise split of its revenues but the “Rest of Asia-Pacific Region”, which includes India, recorded sales of $6.15 billion for the third quarter, a 14% increase from $5.4 billion in the year-ago period. According to CEO Tim Cook, revenue in India nearly doubled in the June quarter. Apple’s business in Greater China, which includes Taiwan and Hong Kong, declined 1% on a year-on-year basis to $14.6 billion, mainly because of major COVID restrictions that hurt demand. However, demand in America and Europe remained resilient.

Exhibit 2: Apple’s Region-wise Revenues (in $ billion)

Source: Company Financials, July 2022

Outlook

The company did not provide any formal guidance for the next quarter but the management commentary did contain some positive news. CEO Tim Cook and management expect revenue to accelerate compared to the just-finished quarter. However, analysts expected the company to give its fourth-quarter EPS guidance of $1.31 and about $90 billion in revenues for the fourth quarter. The company also expects further headwinds from a stronger U.S. dollar versus foreign currencies.

Apple’s September quarter is also the same period when Apple launches its much-awaited iPhone 14 and iPhone 14 Pro models. If earlier reports were to be believed, there were some supply chain challenges due to which some models of iPhone 14 lineup were expected to be delayed. However, Apple did not give any such warnings during the earnings call, which assures the investors that the company has successfully navigated the supply chain issues and the iPhone 14 models are well on track.

Exhibit 3: Apple Stock Price Performance History

Source: MSN Money, Data as of last close on 1 August, 2022

Exhibit 4: Current Value of $100 Invested in Apple’s IPO

Source: Stockal Research, July 2022

Exhibit 5: Analyst Ratings on Apple Stock

Source: Benzinga.com, 29 July 2022

Amazon rallies on solid sales and an upbeat outlook

Amazon shares climbed 10.4% after it reported strong revenue for the second quarter and forecast stronger sales for the next quarter. Continued growth momentum in Amazon’s cloud unit AWS and advertising services helped boost revenues when online store sales fell 4% during the three months ended 30 June. However, revenues from physical stores and subscription services grew 12% and 10%, respectively, in the same period.

Exhibit 6: Amazon’s 2Q2022 Earnings Highlights

Source: Company Financials, CNBC, July 2022

Amazon reported a net loss of $2 billion, or $0.20 per share, compared with net income of $7.8 billion, or $0.76 a share, from a year ago. This includes a loss of $3.9 billion from Amazon’s investment in electric vehicle maker Rivian Automotive (RIVN), whose shares dropped 49% in the quarter.

AWS keeps Amazon’s growth momentum up

Amazon Web Services, or AWS, posted better-than-expected sales for the third quarter as it continues to reap benefits from a booming cloud sector. AWS revenue for the third quarter jumped 33% to $19.74 billion. AWS is the world’s top cloud provider, representing an annualised sales run rate of about $79 billion. Operating income increased to $5.72 billion, in the quarter ended 30 June, from $4.19 billion a year ago.

Exhibit 7: Amazon Web Services Quarterly Net Sales and Operating Income (in $ billion)

Source: Company Financials, July 2022

Amazon believes that the cloud sector is still in its nascent stage of adoption. Hence, the company sees a great opportunity to continue investing in capacity-building and expanding AWS presence to new regions. According to Dave Flides, Director of Amazon’s Investor Relations, “ Right now, we are at 84 availability zones, so that’s 26 geographic regions and we’ve got plans to launch 24 more of those availability zones across eight regions – Australia, Canada, India, Israel, New Zealand, Spain, Switzerland and the UAE.”

Amazon’s ad revenues jump 18% in Q2

Advertising is one of the fastest growing businesses of Amazon, thriving even when digital marketing faces a myriad of challenges. Advertising revenue in the second quarter jumped 18% to $8.76 billion, well above market expectations of $8.65 billion. Amazon’s robust ad growth is in contrast to disappointing results from ad giants like Facebook (META), Twitter (TWTR) and Snap (SNAP) which reported disappointing results due to a slowdown in ad spending.

Amazon’s ad growth shows that advertisers are shifting to more effective ad platforms that generate superior results for them. Amazon, being an online retail giant, sits on a treasure trove of vast consumer data. Since it does not depend as heavily as Facebook on tracking user data from across different applications, Amazon has been able to survive Apple’s privacy changes better than its rivals.

Moreover, Amazon has been working on keeping its ad platform one step ahead of the competition. Its Amazon Marketing Stream (Beta) provides automatic hourly sponsored campaign metrics to marketers for them to optimise their campaign. Amazon Marketing Cloud Insights helps advertisers use AWS services when running Amazon Ads campaigns to analyse their ad performance.

Amazon sees higher sales in the third quarter

Amazon anticipates consumer demand to remain resilient in the third quarter despite U.S. consumer sentiment falling to a recent low. For the three months ending 30 September, the company expects net sales in the range of $125 billion to $130 billion, against analyst estimates of $126.42 billion. The upbeat outlook, representing revenue growth of 13% to 17%, comes after the big-box retailer Walmart Inc (WMT) raised concerns over shifting consumer behaviour due to rising inflation.

Exhibit 8: Amazon’s 3Q2022 Outlook

Source: Company Financials, July 2022

Exhibit 9: Amazon Stock Price Performance History

Source: MSN Money, Data as of last close on 1 August, 2022

Exhibit 10: Current Value of $100 Invested in Amazon’s IPO

Source: Stockal Research, July 2022

Exhibit 11: Analyst Ratings on Amazon Stock

Source: Benzinga.com, 29 July 2022

Facebook-parent Meta’s first-ever revenue decline, decade long streak comes to an end

Meta Platforms reported a worse-than-expected second quarter as its net income fell by a whopping 36% to $6.69 billion. Quarterly revenue reduced by 1% to $28.82 billion, failing to meet market expectations of $28.94 billion. This was Meta’s first ever year-on-year revenue decline since going public in 2012, as its decade-long revenue growth streak came to an end.

Exhibit 12: Key Highlights of Meta’s Q2 Earnings

Source: Company Financials, CNBC, July 2022

Exhibit 13: Meta’s Year-on-Year Quarterly Revenue Growth (%)

Source: macrotrends.net, July 2022

TikTok: ticking time bomb on Meta’s growth

One of the main challenges for Meta is the exponential growth of TikTok, which is luring users and taking the lion’s share of the ad market. To combat the threat of TikTok, Meta has been focusing more on its Reels format, a TikTok-style short video feature. The company also unveiled a new design for its main Facebook app, which includes a redesigned home feed that mimics the appearance of TikTok’s “For You” suggestion page. According to CEO Mark Zuckerberg, Meta’s Instagram Reels service, which competes with TikTok, has generated $1 billion in annualised revenue. However, despite the investment in reels, the service doesn’t generate revenue as effectively as Instagram Stories and the main news feed.

Exhibit 14: Average Monthly Hours Spent per User on Different Social Media Platforms

Source: thenetworkec.com, April 2022

Meta struggles with the ongoing ad market troubles

Meta’s poor results follow the trend that rivals Snap and Twitter started last week. Both the social media companies posted disappointing second-quarter results, and executives blamed the economic downturns and mobile platform challenges for the worrisome online ad market. Additionally, Apple’s App Tracking Transparency, a privacy feature that prevents apps like Facebook from monitoring user activity across the web and apps, limits Meta’s ability to give advertisers accurate user behaviour insights. As a result of the ongoing ad market troubles and Apple’s privacy feature, the social media giant reported that the average price per ad fell by 14% year-on-year in the second quarter.

Exhibit 15: Meta’s Advertising Revenue per User, Geographically (in $ billion)

Source: Company Financials, July 2022

User base growth falls short of expectations

Meta reported that the number of monthly active users on the Facebook app grew 1% to 2.93 billion but missed Wall Street’s estimate of 2.94 billion. Its average revenue per user (ARPU) stood at $9.82, just falling short of expectations of $9.83. However, the company also disclosed that Facebook’s daily active user base rose to 1.97 billion, topping the estimated 1.96 billion. Moreover, the social media company revealed that around 2.88 billion people now use its family of social apps – Facebook, Messenger, Instagram, and WhatsApp every day, which is an increase of 4% from a year ago.

Exhibit 16: Meta’s Total Daily Active Users, All Apps (in billion)

Source: Company Financials, July 2022

Meta’s Outlook: Something to worry about

Exhibit 17: Meta’s Projections for the Rest of the Year

Source: Company Financials, July 2022

Meta issued a disappointing third-quarter forecast, citing that they expect quarterly revenue to be in the range of $26 billion to $28.5 billion, a decline from $29 billion a year ago. The company attributed this poor forecast to the weak advertising demand driven by broader macroeconomic uncertainty. Meta also anticipates third-quarter Reality Labs revenue to be lower than the second-quarter revenue. Facebook-parent said its headcount increased 32% from a year earlier to 83,553. However, CEO Mark Zuckerberg said that the company plans to slow the pace of hiring, echoing the economic slowdown and the sentiment from many of its tech peers. Additionally, they project total expenditures in 2022 will be between $85 billion and $88 billion, down from the earlier projections of $87 billion to $92 billion. The company attributed the lower projection to a reduction in hiring and overall expense-growth plans for the year.

Exhibit 18: Meta Stock Price Performance History