Mega tech companies such as Google parent Alphabet (GOOG: GOOGL), Amazon (AMZN), and Microsoft (MSFT) all reported earnings for the first quarter of the calendar year 2017, along with Expedia (EXPE), Intel (INTC) and some other, less techy companies such as Starbucks (SBUX). The results taken together had some broad implications, and individually revealed some solid opportunities.
From a broad perspective, the earnings numbers, even of the companies that seemed somewhat disappointing, proved a point. A couple of days ago I wrote here that while there were signs of problems with some delayed IPOs in the tech sector, the fact that the Nasdaq is above 6k should not be a cause for worry.
“This time” I wrote “is different...” and if you had any doubts about that, yesterday afternoon should have removed them completely. What is different now as opposed to the year 2000 is that the record highs are not being driven by speculation or unbounded optimism, but by rapidly increasing profits from companies listed on the exchange.
In part that change is simply down to maturity. Nasdaq started life as an exchange in 1971 and in 2000 was still the young upstart where the companies of the future, rather than the established firms, listed their stock. A booming Nasdaq index at that time indicated unbounded optimism about the future and a belief that at some point in the future tech would be big business.
As we know all too well that was an accurate, if slightly premature prediction, and now those same companies have become money making machines. The record highs in the index simply reflect record profits, with multiples of future earnings that are actually quite conservative given current growth rates.
Probably the most impressive report yesterday was from Alphabet, which recorded a beat of expectations on the bottom line (EPS of $7.73 vs. $7.78) and a massive beat in terms of revenues ($24.75 billion vs. $19.78 billion). Those are spectacular numbers, but what really stood out in the release was the fact that, despite some issues with a boycott by advertisers of YouTube, revenue grew around twenty two percent year on year. The signs are that Google are dealing with the advertisers’ issues but even without that revenue, this was a remarkable number.
The law of large numbers as it applies to companies should, one would expect, be coming into play here. It is not too hard to increase revenue from say $100 million to $120 million, but once a certain size is reached, improving on the previous year by billions at a time to maintain double digit percentage growth should be virtually impossible. Obviously Google is unaware of just how hard that should be and they continue to do it, and for that reason, if no other, GOOGL still looks like a steal, even at record highs.
Another company to report good results was Intel (INTC), but here the market reaction rather than the numbers themselves is what creates the opportunity. The chip maker matched expected revenues, beat expected earnings, raised year end guidance and tripled the size of their share buyback program.
Normally that combination would be seen as extremely positive, but due to a high whisper number and therefore significant recent gains in the stock that had left many traders long, INTC dropped around four percent immediately after the release. Those factors, however, are very short term and it is reasonable to expect a rapid recovery in INTL and further appreciation in the coming months.
A similar story came out of Microsoft (MSFT)’s earnings, where they reported roughly in line revenue and a beat on the bottom line, but again shares traded lower in the aftermarket yesterday. This too is probably the result of inflated, maybe even unrealistic expectations, and overlooks the most encouraging thing about the report. Sure, sales of hardware products were a bit disappointing but the cloud services division which CEO Satya Nadella has made a priority is showing robust growth. Once again, early weakness looks like an opportunity more than anything.
Returning to a broad based overview, one thing is clear from yesterday’s rash of high profile tech earnings. The sector is doing fine and, despite being massive already, continues to grow. The natural caution that results from history and from the impressive size of the sector, however, means that there are still plenty of investing opportunities, and investors should not hesitate to take them.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.