Weekly Financial Review #20

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Tech Earnings Fail To Turn The Tide

With expectations running high, most major US tech stocks have now reported third-quarter results – and although most delivered, their share prices fell.

 

Recap

  • Stocks around the world fell in October, even as inflation slowed in the US. > Read our story

  • Investors were geared up for high profit growth from tech companies due to report in October. > Read our story

  • Last week, Netflix reported a third quarter that beat expectations – and its share price rose. > Read our story

  • But this week, better-than-expected third quarters from both Amazon and Alphabet weren’t enough to buoy up their falling stocks. > Read our stories on Amazon and Alphabet

 

Connecting The Dots

Investors had high hopes for the tech giants. The continued shift to online shopping from store-based retail, and to TV and film streaming services from cable and satellite networks, left companies like Amazon and Netflix poised to deliver high growth.

And while, by and large, they did exactly that, costs – and not just profits – are rising too. Alphabet, for example, keen to get its cloud computing business off the ground, is spending heavily on new data centers. Netflix, meanwhile, is set to spend as much as $13 billion this year on original content to stay competitive (as rivals like Disney pull content to use on their own streaming services), leading it to borrow a fresh $2 billion via bonds this week.

More fuel on the cost fire comes from management shake-ups. Facebook’s had more than its fair share in recent months, with the founders of subsidiaries Instagram and Oculus following WhatsApp’s boss out the door; and a top Alphabet executive reportedly left with a $90 million golden goodbye. But having their backs against the wall could force tech companies to innovate. Google was hit with a monster fine in July for unfairly pushing its apps on Android phones – so instead will now charge phone manufacturers a fee for their use. A fine thus begets a fine new revenue stream.

 

Takeaways

  1. Tech-nically great – but investors weren’t buying.

    When markets wobble, tech stocks tend to fall first and fastest – as they have this month. When times are good, investors warm to tech stocks’ potential for high sales growth; but feet can quickly grow cold at the first sign of trouble, with favor instead falling on shares of more “predictable” companies, where prices relative to expected profits are often cheaper. Stubbornly high costs in tech town may have chilled investors to the bone, as they suggest future profits may not be as high as previously hoped.

  2. The hero investors deserve, not the one they need.

    Tesla tried its best to help reverse the market rout, reporting a surprise quarterly profit for only the third time in its history – which sent its stock up some 20% this week. US tech stocks account for about a quarter of the market, and some investors were hopeful that the big dogs’ results would lead to a flurry of buying and higher stock prices all round. But the share prices of Amazon and Alphabet both fell after their results – leaving those investors looking elsewhere for a way to jump-start markets again.

 

Also On Our Radar

There were indications that the global economy’s in the later stages of its cycle this week when massive manufacturer 3M reported disappointing third-quarter results. Its products are produced relatively quickly: so when customers' demand starts to wane, they curb purchases of these items first. On the other hand, long-lead products like aeroplanes and jet engines are harder to cancel, helping companies like United Technologies and Boeing to report better-than-expected results.

 

Reading For The Weekend

  1. EY discusses the shifts in retail culture: Read more
  2. The cloud’s the limit, according to McAfeeRead more

  3. Fidelity explains how understanding the business cycle can help investors: Read more

 

 

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