'4A' Earnings Show Strength in Big Tech: AMZN AAPL BABA GOOG

The last twenty four hours have been big for tech earnings, and curiously enough particularly for companies in the sector whose names begin with the letter “A”: Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL) were joined by the Chinese company Alibaba (BABA) in reporting Q4 earnings.

That is a plethora of “A”s, but what, if anything, do the 4A earnings tell us about the state of tech stocks in a more general sense? The answer I’m afraid, is very little. On the surface, results were mixed, but dig a little deeper and it becomes clear that the future of big tech is still bright.

AMAZON (AMZN): Shares jumped over 6% immediately following yesterday’s after-hours release as Amazon recorded record profits for the quarter. That after falling in a big way during market hours yesterday as traders convinced themselves that they had got a little too enthusiastic about the company’s prospects going into the numbers. That shows how dangerous it is to underestimate Bezos et al, but the massive EPS beat ($3.75 vs. $1.85 expected) has significance for Amazon in many ways.

There have, at various times, been those that have questioned the price of AMZN on the basis of their P/E ratio. They point out, quite rightly, that business is about more than growth, it is about profit. What seems to happen, however, is that each time that chorus of criticism rises, Amazon comes up with a “show-me” quarter or two. They seem to be able to turn on the profit tap at will, suggesting that in this case it really is all about growth.

Even more significant in many ways was where those profits came from. The web services division (AWS) was once again strong, and Alexa products showed massive growth. AWS is relatively high margin, an important thing for a company whose core business is low-margin discount retail, and Echo sales bring new consumers into the Amazon ecosystem and expand contact with those already in it. That suggests that sales and margins can continue to grow, so even AMZN’s downbeat 2018 guidance won’t discourage buyers.

ALPHABET (GOOG, GOOGL): Google parent Alphabet reported earnings at the other end of the spectrum in terms of EPS. They missed Wall Street’s estimates of $9.98 in earnings per share, reporting only $9.70. Shares took an initial hit, falling by over 5%, but bounced back somewhat during the ensuing conference call as other factors were taken into consideration. They included a beat on revenues, but, more importantly the details of the quarter also revealed growth in paid clicks and a smaller than expected decline in costs per click, indicating that Google’s core ad revenue is on the right path.

In addition, CEO Sundar Pichai offered a breakout of Google’s cloud services, referring to that division as a billion dollars a quarter business. As with Amazon, that growth in cloud business was significant. Google has lagged its major competitors in the field and still does, but if the higher costs that the revenue beat and EPS suggest are the result of what look like successful attempts to catch up, that must bode well for the future.

Apple (AAPL): Apple was, both in terms of results and the stock’s reaction, right in the middle, and when looked at in total, can best be described by two words, “as expected.” Yes, they beat on the top and bottom lines, but neither was by a big margin, and that was offset by a slight miss on iPhone shipments. Guidance was also lowered, but margins increased significantly as the relative success of the iPhone X demonstrated that price was not a significant deterrent to those seeking the best that Apple has to offer.

In all, then, it was a bit of a “blah” earnings report from Apple, but, as I pointed out a few days ago, traders were so pessimistic going in that “as expected” could easily result in a recovery in the stock over the next few days.

ALIBABA (BABA): Alibaba did the opposite of Google, beating on revenues while missing on EPS. That miss went some way towards the stock losing ground following the report, but there was also another factor. In an announcement that in some ways overshadowed revenue and earnings, BABA stated that they would shift from a revenue sharing arrangement with mobile payment company Ant Financial, who run the Alipay system, to an equity position with a 33% stake.

What worried traders here was the, shall we say “unusual” terms of the deal, with Alibaba paying for the stock with “certain intellectual property.” This looks like a case of traders overthinking the implications of that. We don’t know exactly what intellectual property was given up, but whatever it is a long-term view suggests that it could be a great deal for Alibaba.

Let’s assume, quite reasonably, that this big stake in Ant is the precursor to a complete takeover. When and if that happens, BABA gets that intellectual property back, presumably at the same implied value. Even if they never make that move, a big stake in a mobile payments company should be accretive to earnings in a country where mobile payments are huge and still growing. Overall, this looks like a good report for BABA as well.

The 4As reports were mixed in terms of the headline numbers as you can see, but each contained a reason to be optimistic. Big tech, it seems, is still a good place to be.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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