Trading and investing, like seemingly so much in life these days, often comes down to feelings versus facts. That is definitely the case right now with big tech stocks, where the feeling is that after such a strong run, they are too high, with stretched valuations. The facts, however, keep intruding on that narrative and did so again yesterday afternoon when three of the biggest -- Apple (AAPL), Alphabet (GOOG:GOOGL), and Microsoft (MSFT) -- reported earnings for the second quarter.
All three companies easily beat Wall Street expectations on the most important number of all, EPS, which suggests those valuations are more realistic than stretched. Even more impressive given their size, they also all posted much higher revenue than expected. The law of large numbers as it applies to stock analysis says that once a company grows beyond a certain point, revenue growth inevitably slows. It is much harder to grow existing sales of, say Apple’s $35 billion or so by a significant percentage than it is to add to revenue of $100 million or whatever. That makes sense and feels right, but on that front too, the facts don’t support the feelings.
All three tech giants defied the law of large numbers when it came to revenue last quarter. Microsoft had the most “disappointing” report, with “only” a 21% year-on-year increase, behind Apple’s 36% and Alphabet’s stunning 62% jump. Obviously, Q2 2020 was an aberration of sorts as the pandemic, or at least the reaction to it, was at its height, but all three firms smashed same quarter 2019 numbers too. This was not a product of an unusual comp; it was just great performance by three of the world’s most successful companies.
And yet, as I listen to commentary on these earnings this morning, feelings are driving so much of what is being said. I have heard phrases like “flattening iPhone sales,” “peak in ad revenues,” and “slowdown in enterprise business” -- things that feel right in the face of such great results and such big numbers, but that have been feeling right for years now, even as revenues and profits have continued to grow.
The facts tell the real story.
Sure, iPhone sales are the biggest line item for AAPL, but the current great numbers are being driven by updating and switching to the iPhone 12 from other manufacturers’ models. Ever since the first iPhone, Apple has continued to build a better, more popular version every few years. Are you going to bet against them continuing to do that? Even if they don't manage to create a popular phone, huge growth in every other area of the company’s business indicates that they are preparing for that time, should it come.
As for peaking ad revenues for Google, that will come when e-commerce dies down and people stop searching online for things before they buy them, which is a time so far off that it is irrelevant. For Microsoft, there is no shortage of companies moving to hybrid work models and looking for tech-based cost savings in an inflationary environment and, while I suppose that at some point, they will all have updated their tech, that too looks a long way off.
If there is a risk to these companies’ futures, it is political and regulatory in nature. They seem to have achieved the admirable feat of being hated by both sides of the political divide. Democrats are turned off by their size and success, while Republicans hate that they have achieved that while embracing some “liberal” ideas.
Once again, though, while that feels like a recipe for some restrictive regulations, the facts show that so far, the political attacks have led only to some small concessions and relatively small fines, none of which have had a material impact on growth. Understand that I am not saying that these companies shouldn’t be regulated in some ways, nor am I saying that they should. Those are feelings, and the fact is that so far, they haven’t been.
For investors, it comes down to trust. Do you trust your feelings that these stocks are too high, that trouble is coming soon? Or do you trust the fact that although those feelings have been around for several years, AAPL, MSFT, and GOOGL are close to record highs and the companies keep posting record revenues and profits? I know which I trust more.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.