The best hedge dominant U.S. consumer tech companies can hope for against increasing regulation and a darkening global outlook is still faster growth than other industries can achieve.
Microsoft is about to kick off earnings for U.S. technology leaders on which stock market stabilisation might depend. Their role of fuelling the Nasdaq 100, which has become a de facto benchmark for U.S. investors, means strong reports could go a long way towards arresting weeks of heightened volatility. Web behemoths also need to demonstrate that their numbers aren’t flagging whilst they deal with a rising tide of regulatory currents. Ironically though, for such an influential sector, only Microsoft has well-established profits. And in recent quarters even the software firm's income has played second fiddle to hotly scrutinized metrics like cloud subscriptions. With Wall Street sell-offs often ignoring key top- and bottom-line beats this earnings season, Big Tech’s best hope of putting a floor under its shares could again be raw growth.
Microsoft’s Azure must shine again
Microsoft’s report, out on Wednesday night, covers its first quarter of the 2019 financial year. The benchmark of strong results for the group will again be cloud. Following heavy investments, Microsoft’s multi-quarter run of expansion in flagship cloud division Azure, has seen revenues from online software and services outpace erstwhile leader, Amazon. Azure sales have risen more than 80% in almost every quarter over the last four years, including an 89% surge over three months to the end of June. Microsoft needs to match, or preferably beat that rate to stem an almost 10% fall by its stock so far in October.
Amazon AWS in focus
Remarkably, whilst Amazon is still known by most for an e-commerce business that’s still growing faster than the conventional retail market, its real power, profits and growth comes from businesses that initially looked like sidelines. Take, Amazon Web Services revenue, that grew 49% to $6.1bn in the prior quarter whilst providing over half Amazon’s total operating profit. Subscriptions, chiefly Prime membership with streaming video as a perk, grew ‘just’ 57% percent. AWS growth could comfortably fall to 45% year-on-year in Q3 and sales would still rise quarter-on-quarter to $6.67bn when it reports on Thursday. The stock would be punished if growth slowed any further.
Twitter purge lingers
Twitter’s purge of fake users and tougher stance on misuse damped user growth, but advertising sales grew 24% in its second quarter. With monthly active users expected to fall by another “mid-single digit millions” more in the quarter, the onus on the group is to ensure MAU’s don’t fall below 330 million is even heavier. It will be an even tougher feat to pull off if tougher data protection rules make it even easier for passing traffic to avoid signing up. Twitter will report before the U.S. market opens on 25th October.
Google raises its own bar
Digital advertising is still less than half the global $628bn market, and most of the digital ads are on Google and Facebook. Stripping out the biggest ever European Union fine that toasted revenue growth in Q2, the Alphabet-owned platform actually beat Wall Street’s expectations by 23%. Advertising revenue alone has beaten forecasts for four straight quarters. In itself, failure to trounce the Street view again, when the group reports Q3 results on 25th October, could weigh on its shares. Ad revenues are forecast to rise 20.6% on the year to $29.04bn.
Facebook investors overreact
The social network’s cack-handed response to everything from privacy concerns and attempts to manipulate voters with its platform obscures a less alarming potential fall in growth than might be expected given the share’s 18% fall this year. Indeed, with Facebook stock set to mark its first ever annual decline, its 42% rise in second quarter revenues compared to 49% in Q1 makes the loss of investor confidence look overdone, even factoring in long-term guidance that quarterly growth could fall to 30%. To be sure, developed market user growth looks to have peaked. FB faces hurdles lifting the 2.23 billion global total as fast as in years past. But Facebook is taking its time in confirming the rise of user bases at its other platforms like Messenger, WhatsApp and Instagram. The latter alone is widely thought to have 1 billion users. None of those assets are being monetised to any great extent yet. Facebook ad sales are forecast to rise 34.6% to $13.65bn in Q3, after a 42% jump to a similar figure in the quarter before.
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