Anyone else’s heart always racing during earnings season?

Last week, we had some of the largest companies in the world release their quarterly financial reports — Amazon, Apple, Microsoft, and Meta. Through this release, we learned a lot about the state of the economy, the confidence of “experts,” and what’s still extremely profitable for Big Tech.

In this post we’re going to walk through the numbers reported by each company, provide some additional commentary made by Wall Street, supplement that with my own commentary, then share my change in position with the stock.

Amazon (AMZN) — problems with solutions

As most of you all know, Amazon is one of my largest holdings in my portfolio (6% weighting). The reasons to bet on Amazon in the long-term far outweigh, in my opinion, the reasons not to.

Let’s walk through the report together.

Revenue: $116.4 billion, an increase of +9% YoY

Operating Income: $3.7 billion, a decrease of -58% YoY

Profits (Loss): -$3.8 billion, down from +$8.9 billion this time last year

A few negative figures here, so let’s breakdown what’s going on.

First, the revenue print of +9% was at the top-end of the company’s guidance ($112B — $117B), a good thing. This bump in revenue shows us that the demand for their products and services is still exceptionally strong. The company’s Prime members are spending ~2X more with the company now compared to pre-pandemic benchmarks — Amazon also added millions more Prime members during the quarter.

Lower operating income — not exactly a bad thing. Since the pandemic started, the demand for Amazon’s products and services skyrocketed, and the only way to keep up with that demand was to scale quickly. In ~12 months, Amazon doubled their workforce (1.6 million employees) and their logistics operation. This money has to come from somewhere.

So much has changed for this company since the first quarter of 2021 —

“We'll break these into two buckets, externally driven costs, primarily inflation; and internally controllable costs, primarily productivity and fixed cost deleverage. The externally driven costs are a result of intensifying inflationary pressures throughout Q1. Line haul air and ocean shipping rates continue to be at or above the rates in the second half of last year, which were already much higher than pre-COVID levels. Some of this is due to the impact of the Omicron variant in China and labor shortages at point of origin, and the start of the war in the Ukraine has contributed to high fuel prices.”

The above mentioned factors cost the company -$6 billion in operating income during the quarter. Which means all else equal, their operating income would have been ~$10 billion this quarter.

What I’m trying to say is that margin pressure eating into your profits is a lot different (and better) then a complete lack of demand from your customers. I’m also trying to bring light to the fact that the company would have very likely reported a profitable quarter if it wasn’t for these factors.

These are problems with solutions.

“We do expect the effects of these fixed cost leverage to persist for the next several quarters as we grow into this capacity. When you combine the impacts of the externally driven costs and the internally controllable costs, you get approximately $6 billion in incremental costs for the quarter. Approximately two-thirds of these costs are within our control. And with demand normalizing, we remain focused on rightsizing our cost structure and driving out any cost inefficiencies.”

These solutions exist and are being implemented as we speak, but it will take some time until we’re able to get back to normal. Amazon is guiding to -$4 billion in incremental costs impacting their business in Q2.

The good news? Amazon’s AWS business segment continues to carry the team. Amazon Web Services produced $18.4 billion in revenue during the quarter, an increase of +37% YoY and now represents an annual run-rate of $74 billion. Operating income of this business segment continues to climb (and outpace revenue growth).

Bank of America — Justin Post ($3,700)

“Amazon is facing especially difficult comps in 1H, and its profit outlook deteriorated as the Ukraine conflict brought lower volumes and new cost challenges. Bears may argue more input cost pressure and higher wages ahead, but we expect better labor utilization and higher 3P fees & product prices to help offset.”

Buy rating based on:

Strong AWS fundamentals
Share gains in US eCommerce in 1Q22
Potential for meaningful acceleration in 2H22 as comps ease
Track record of finding efficiencies after big investment cycles

Wedbush — Michael Pachter ($3,500)

“Amazon is taking the right steps to operate amid a challenging macro environment that includes unforeseen inflation and a supply chain crisis, among other headwinds. We view the Q2:22 guidance provided by the company as being overly conservative, particularly from a profit perspective given favorable mix shift and the potential for labor productivity and capacity leverage improvements. Longer-term, Amazon can drive steady margin expansion by investing in its cloud, fulfillment, and advertising businesses.”

Outperform rating based on:

Several incremental expense headwinds we expect Amazon to overcome

It’s wild to me how accurate Katie Stockton was on this stock. For those of you who aren’t aware, she’s an absolute wizard with technical analysis and in December said that Amazon’s fall from grace was right around the corner.

However, despite this -12% drop in stock price I’ll be adding to my position. I don’t know about you all, but I believe Amazon isn’t going anywhere anytime soon. The demand for their products are there, they forecasted this demand as staying consistent / increasing next quarter, and AWS is crushing it. I’m still sitting on a big pile of cash waiting to be deployed into some undervalued long-term winners — and Amazon at $2,500 is that for me.

Apple (AAPL) — macro headwinds rising

Apple is one of Warren Buffett’s largest holdings in his portfolio (~900 million shares), making it one of my largest holdings in my portfolio. I recently trimmed off 44 shares of Apple around $170 / share given his position — more on that here.

Let’s jump into the report together.

Revenue: $97.3 billion, an increase of +9% YoY

Operating Income: $30.0 billion, an increase of +9% YoY

Profits: $25.0 billion, an increase of +6% YoY

Tons of great things to share here, as well as a major eyebrow raiser.

The company reported record revenue for the quarter — which means consumer demand for their luxury products is continuing to move in the right direction. The Services business segment set an all-time revenue record catalyzed by subscription strength. Despite supply constraints, the company’s release of PCs with an M1 Ultra chip inside drove a +15% bump in revenue for the company.

Now the eyebrow raiser — Apple refused to offer revenue guidance for the coming quarter.

Why would they do this?

“We believe our year-over-year revenue performance during the June quarter will be impacted by a number of factors. Supply constraints caused by COVID-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of -$4 billion to -$8 billion which is substantially larger than what we experienced during the March quarter.
The COVID-related disruptions are also having some impact on customer demand in China. With respect to foreign exchange, we expect it to be a nearly -300 basis point headwind to our year-over-year growth rate. Additionally, we paused, all sales in Russia during the March quarter. This will impact our year-over-year growth rate by approximately -150 basis points.”

The silver lining? When asked about macro-economic demand and variables, Tim Cook replied by saying this:

“We're obviously monitoring our daily sales very closely. From an inflation point of view, we are seeing inflation. It is or was evident in our gross margin last quarter and in our OpEx last quarter and it is assumed in the guidance that Luca gave for this quarter as well.
Right now our main focus frankly speaking is on the supply side.”

So, Apple refused to provide revenue guidance not because they were afraid of consumer demand for their products, but instead because they’re afraid they won’t be able to produce and ship the products to their customers as a whole. Demand is there, but Apple’s ability to fulfill that demand isn’t.

Oppenheimer — Martin Yang, CFA ($190)

“Our bullish bias on Apple has not changed. Apple has built the most durable consumer electronics supply chain to ensure its advantage over less integrated, smaller competitors in tough macro environment. We expect the company to continue deliver long-term growth in cash flows and profit as the result of core business strength, margin expansion, and buybacks.”

Outperform rating based on:

Despite little visibility into the future, Apple continues to outperform competitors with superior products and margins, more so when macro environments are rough.

It’s pretty crazy to think that despite everything that’s been going on around the world as it relates to supply chain constraints, war, COVID, etc. Apple is still able to set financial records for their company.

Despite not giving guidance, Tim Cook did reassure us of the immense and continued demand for iPhones and the healthy growth their Services business is expecting throughout the second half of 2022.

If Apple didn’t disclose this -$4B to -$8B headwind in revenue they’re expecting this coming quarter, Apple’s Q2 revenue would have been insanely high. Consumer demand is there, which keeps me invested and buying the dip.

Microsoft (MSFT) — fastest in two years

Another massive holding of mine is Microsoft, and for good reason. Their cloud business has been growing like a weed, and that certainly didn’t change this quarter.

Feel free to follow along here.

Revenue: $49.4 billion, an increase of +18% YoY

Operating Income: $20.4 billion, an increase of +19% YoY

Profits: $16.7 billion, an increase of +8% YoY

Honestly, there’s not much to be critical of here.

It was a record third quarter, catalyzed by a +32% bump in Microsoft Cloud revenue ($23 billion). The number of $100M+ contracts sold to Microsoft Azure more than doubled year-over-year. If you’re keen to learning more about their cloud product, click here.

LinkedIn saw record engagement, as more than 830 million people used the platform. Also, employers looking to hire folks on LinkedIn increased +88% during the quarter. Their gaming business segment also experience global market share growth during the quarter. More than 10M gamers used Xbox Cloud Gaming to stream games, and hours played on Game Pass is up +45%.

Unlike Apple, Microsoft issued guidance for their business despite complex macroeconomic factors.

“We expect to close FY22, even in a more complex macro environment, with the same consistency we have delivered throughout the year. With strong revenue growth, share gains, and improved operating margins as we invest in the areas that are key to sustaining that growth. As we look toward FY23, our track record of delivering high value to our customers across many diverse and durable growth markets gives us confidence that we will drive continued healthy double-digit revenue and operating income growth.”

Oppenheimer — Timothy Horan, CFA ($340)

“Microsoft reported better than expected March-quarter results. Also, the key metric that moves the stock, Azure Cloud revenue, accelerated to 49% constant-currency growth from 46%, the fastest pace since 4Q20 on double the revenue base. Positively, Azure guidance for F4Q22 was strong, sequentially moderating by only "2 points on constant-currency basis" from its current torrid pace. Consolidated guidance also solid and in line, relieving investor trepidation about macro.”

Outperform rating based on:

Up / cross-selling existing customers
Cloud PC and wholesale networking services runway for growth

No change here on my end. Microsoft is continuing to prove to the world that their cloud business is picking up steam and should be taken more and more seriously. Azure Cloud revenue increased by +49%, the fastest pace since in late-2020. This is only going to continue throughout the remainder of the decade, and bodes well for AWS.

Meta (FB) — a sigh of relief

As you all remember, Meta Platforms isn’t exactly on anyone’s “nice” list after their last quarterly report. This quarter, however, was a big sigh of relief for those who stuck it out.

Follow along here.

Revenue: $27.9 billion, an increase of +7% YoY

Operating Income: $8.5 billion, a decrease of -25% YoY

Profits: $7.5 billion, a decrease of -21% YoY

In the earnings call, the Zucks shared with us Meta Platforms’ three main investment priorities that will catalyze growth for their business: Reels, Ads, and the Metaverse.

Reels — it’s obvious to you and I that short-form video is here to stay. TikTok is now a ~$100B company that’s on track to triple their revenue in 2022. Meta needs to stay competitive, which means offering their own short-form video product. The challenge with this, in the near-term, is the ineffective advertising that stems from it.

YouTube is facing a similar problem — it’s just really hard to monetize against 15-30 second videos.

“In the near-term, this is a drag on revenue because Reels monetization is less than feed or Stories, but I expect that will improve over time. We've seen this type of media format transition multiple times before. Back in 2012 when we transitioned from desktop feed to mobile feed, we saw mobile feed growing massively but not monetizing well yet, and we leaned into it, went through some tough quarters, and then it became the foundation of our business today.”

Ads — with Apple’s iOS update derailing the company’s ability to see firsthand how users interact with ads on their platforms, it’s hard to know what converts best. Zucks’ solution? Artificial intelligence adjustments that will take a few years to complete.

“We're making major AI investments to build the most advanced models and infrastructure in the industry. Over the next year or two, we hope that this drives better recommendations for people, higher returns for advertisers, and increases our revenue growth even in the face of signal loss.”

Metaverse — Mark continues to harp on his fascination with the metaverse and is a big believer that it is going to be the foundation for the next era of social technology. He shared his intent to offer a web version of Horizon later this year that will make it easy for folks to jump into the metaverse, without needing a headset.

His strategy to monetize it? Enable others to monetize it as well.

“Our other focus for Horizon is building out the metaverse economy and helping creators make a living working in the metaverse. We expect to be meaningfully better at monetization than others in this space, and we think that should become a sustainable advantage for our platforms as they develop.”

Bank of America — Justin Post ($290)

“We see potential for accelerating growth and improving sentiment in 2H on easier comps, lapping IDFA impact, Reels monetization, new on-platform eCommerce features, and optimism on AI/ML investment to improve ad targeting.”

Buy rating based on:

Driven by user growth
New product offerings (Reels)
New ad formats (Reels, metaverse, etc.)

The company’s stock popped +17% after the release as it seemed like for a moment there was a light at the end of this tunnel. Mark shared his experience building ad-driven products from scratch, and is confident he can do it for both Reels and the metaverse.

To me, Meta Platforms will likely see resilience — maybe even some momentum during the second half of the year — but I’m just not exactly convinced this is the “future.” I’d much rather bet on Cloud businesses like Microsoft, Amazon, and Google.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Rate of Return by Austin Hankwitz

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