The world’s biggest tech companies will be put under the microscope this week when they report earnings for the quarter ended Sept. 30. Club holdings Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), Apple (AAPL) and Amazon (AMZN) have all been bogged down by inflation, weaker consumer demand and a slowing global economy. But despite these macroeconomic headwinds, which could dent earnings, the Club remains confident in the fundamentals of these companies and a long-term investor in each. Here’s what to expect when all 5 tech holdings report. Microsoft (MSFT) When Microsoft reports fiscal 2023 first-quarter earnings on Tuesday after the closing bell, investors and analysts will be looking at the impact of weaker demand for personal computers (PC) and a strong U.S. dollar. Analysts expect earnings-per-share to come in at $2.30, up 1.3% from last year, while total revenue should climb 9.5% year-on-year, to $49.61 billion, according to estimates from Refinitiv. Despite persistent PC headwinds , Goldman Sachs said in a recent research note that it still expects “sustained commercial demand” to support Microsoft’s Windows OEM (original equipment manufacturer) revenue last quarter. At the same time, Goldman analysts predicted Microsoft’s enterprise cloud computing business, Azure, would remain competitive, with 38% year-over-year growth. Meanwhile, a surging U.S. dollar — the U.S. currency has risen more than 16% against a basket of other major currencies since the start of the year — has made Microsoft’s offerings more expensive to international customers. But management’s ability to manage expenses could “offset more pronounced margins/earnings impact” from FX headwinds in the latest quarter, according to Goldman. The Club take: PC and strong dollar headwinds for Microsoft won’t come as a surprise, but we’ll be looking for how these factors impact company guidance. We also anticipate durable Azure strength that could somewhat offset the PC and dollar challenges, but still question how resilient this growth rate is, as enterprise spending tightens in a slowing economy. Alphabet (GOOGL) Profit margin preservation, advertising business performance and stagnating cloud growth will all be top of mind for analysts and investors when Alphabet reports third-quarter results on Tuesday. Analysts expect EPS to plummet by more than 95.5% year-on-year, to $1.26 a share, while total revenue should climb by 8.4%, to $70.6 billion, according to Refinitiv. In July, Google parent Alphabet said it would slow the pace of hiring and investments in 2023 in the face of a softer global economy. But those cost cutting measures will “lag revenue deceleration,” Bank of America analysts wrote in a recent research note. BofA also said it expects third-quarter core margins to come down 445 basis points year-over-year as a result of macroeconomic headwinds. A key area of focus is Alphabet’s online advertising business, where the company earns most of its revenue. Larger companies are likely able to afford to advertise on Google’s search engine, according to BofA. But with e-commerce slowing and currency headwinds persisting, “buyside search expectations,” whereby advertisers buy up ad placements on Google, could see year-on-year growth as low as 5%, below Wall Street expectations of 8% annual growth, the analysts said. Meanwhile, BofA tempered expectations for Alphabet’s cloud growth, which has been under pressure as recession fears mount. Analysts anticipate cloud revenue to grow 33% year-over-year in the third quarter, compared with 45% growth during the same period last year. The Club take: As overall ad budgets shrink, we’re tempering our expectations for outperformance in Alphabet’s advertising business, even as we remain encouraged by the fact the Google search engine remains the preferred outlet for advertising partners. However, we’d like more color on the company’s efforts to invigorate Google Cloud, a higher-margin segment that has a lot of potential. We’d also like to see how much its cost-cutting measures helped improve profit margins. Meta Platforms (META) Meta’s advertising business and data on active users will be in focus when the Facebook- and Instagram parent company reports third-quarter results on Wednesday after the closing bell. Analysts expect Meta’s EPS to fall by 41.3% year-on-year, to $1.89 a share, while total revenue should come down by more than 5%, to $27.41 billion, according to Refinitiv. The metrics of advertising and active users go hand in hand: More active users on the platforms means more opportunities for advertisers to reach potential customers. In particular, analysts and investors will be looking to see improvements in short-form video Reels engagement, Instagram’s offering to compete with social media platform TikTok. Stifel analysts conducted a small business survey the first week of October to gauge the health of digital advertising budgets for the third quarter. Of 244 total respondents, 75% are spending more on ads this year compared to last year, 15% are spending about the same as last year and 10% are spending less, the survey showed. Facebook and Instagram were favored in the survey, with 56% of respondents saying they’re spending more on Facebook this year and 55% citing increased ad spend for Instagram. But if Meta doesn’t offer data that shows improved user engagement, the stock’s value can “likely compress further, even with the promise of cost cuts and improving revenue trends,” Bernstein analysts wrote in a recent note. Meta’s share price has come down more than 60% year-to-date. Like competitor Alphabet, Meta has also been trimming expenses to protect its margins against a challenging macroeconomic backdrop, including cutting back on investments in the metaverse, a key area of future growth. In an open letter to Meta management on Monday, Altimeter Capital CEO Brad Gerstner, a Meta shareholder, called on CEO Mark Zuckerberg to go further with cost cutting to win back the confidence of investors, including a 20% headcount reduction . The Club take: We believe Meta can further monetize through Facebook and Instagram. But this can only happen if the company draws new users to those platforms. While user engagement improved last quarter overall, it has been impacted in part by Apple’s iOS privacy changes, which rolled out last year. The privacy controls have made it more difficult for Meta to target ads — putting new pressure on Meta to maintain its best in class return on investment profile for ad buyers. Apple (AAPL) Apple is set to report fiscal fourth-quarter results on Thursday. Analysts and investors will be watching services growth at the App Store, Apple TV+ and Apple Music, as well as consumer demand for iPhones and other electronics. Analysts expect EPS of $1.27, up 2.2% year-on-year, and total revenue of $88.9 billion, up 6.6%, according to Refinitv. Morgan Stanley analysts said a “constructive” quarter should be driven by “remarkably stable” production in iPhone, iPad and Mac electronics, particularly as iPhone lead times remain elevated . Wall Street expects Apple’s services segment to grow at a slower pace than last year. Morgan Stanley forecasted services revenue of $19.7 billion, up 8% year-on-year and about 2.5% below consensus. In a separate note, Barclays forecasted App Store revenue to fall 2% in the third quarter, a result of an “uncertain macro backdrop” that could impact App Store and advertising sales. Investors will also be assessing consumer demand for the nascent iPhone 14 series. While these sales will likely show up in Apple’s fiscal first quarter, Barclays expects upside on iPhones in the latest quarter due to a positive iPhone 14 mix of sales, with consumer demand tilting toward the higher-end models. The Club take: We are not backing down from our mantra on Apple: Own it, don’t trade it. While the company’s business has been dragged down by Covid-19 lockdowns in China, we see this as a temporary headwind. Moreover, there is evidence of consistent momentum for Apple’s consumer electronics, despite persistent inflation. This does not mean Apple is defensive, but it does mean we see it as a company that can withstand a weak economy. Amazon (AMZN) When Amazon reports third-quarter results late Thursday, investors and analysts will be looking to gauge consumer spending, how the company is managing inflationary pressures and resiliency in its cloud computing business. Analysts expect EPS to nosedive by 96.4%, to 22 cents a share, while revenue should climb by 15%, to $127.57 billion, according to Refinitiv. UBS in a research note lowered its revenue estimate for Amazon’s retail segment to $125 billion for the third quarter, below the consensus figure of $127.7 billion. The analysts cited slower consumer spending in September, lower international sales and foreign exchange pressures. Meanwhile, users continue to go to Amazon’s platform for the end-to-end shopping experience. This was evidenced by a successful Prime Day in July, the hottest sales event in the company’s history. That event was followed by another two-day Prime Early Access Sale earlier this month that kicked off the holiday shopping season. One of the reasons for owning Amazon is for its Amazon Prime membership growth, which “drives recurring revenue,” analysts at Morgan Stanley wrote in a research note. The cloud division, Amazon Web Services, remains a profitable segment. But analysts at Loop Capital said “softening in consumption is likely” at AWS. “New deal activity and incremental demand for AWS specifically remains robust…but expect belt-tightening across the digital economy will be a headwind” in the third quarter, they wrote in a note. More broadly, Amazon has faced high costs in recent quarters as a result of overstaffing, loss of productivity, warehouse overexpansion and higher gas prices, all of which has weighed on margins. Management said last quarter it expects inflationary headwinds to continue through the third quarter. The Club take: Our main question for third quarter earnings is: Can Amazon maintain its leadership in its diverse business verticals? So far, the company has proven that it can. We’re curious if the AWS business is experiencing a slowdown, or has resilient demand in addition to continued progress on margins from cost cutting. (Jim Cramer’s Charitable Trust is long MSFT, META, GOOGL, AMZN, AAPL, AMD. 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Customer inspects iPhone 14 Pro Max inside an Apple store in Marunouchi, Tokyo.
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The world’s biggest tech companies will be put under the microscope this week when they report earnings for the quarter ended Sept. 30.
