Mega-cap technology companies reported increased revenues in the first three months of the year after a challenging period in which US tech giants in particular bwere hit hard by high inflation and rising interest rates.
However, cost-cutting measures had a positive impact on their earnings market expectations in the first quarter of 2023, with Amazon, Meta and Alphabet exceeding.
Hurdles remain ahead, especially for Netflix – the streaming service released its earnings a week earlier – but the response was not as positive. Below Trustnet rounds up the highlights from the earnings reports this week.
Share price of Meta, Amazon, Alphabet and Netflix in 2023
Source: FE Analytics
Amazon
Amazon reported a net income of $3.2bn in the first three months of the year, up from the $3.8bn loss it made over the same period last year.
The tech giant fired 18,000 employees at the start of 2023 in an effort to cut expenses before announcing a further 9,000 layoffs in March.
It also delayed expansions to its Virginia headquarters, cancelled developments of some warehouses and closed a number of Fresh and Go stores.
These cost-cutting measures boosted net income in the first quarter, but Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said that investors were still “disappointed” by slowing growth in its cloud computing branch.
Amazon Web Services (AWS) was an early adopter of the technology and is a leading platform in the space, but this branch of the business took in 21.4% less in the first quarter than the same period last year, with operating income up $5.1bn compared to $6.5bn in 2022.
Lund-Yates said: “The launch pad for further share price growth has been dented, and momentum will be difficult to find for as long as corporate belt-tightening is going on.
“That could get worse before it gets better, given the weaker-than-expected reading of the US economy this week.”
However, Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said that slowing growth in AWS and better revenues across the rest of the company may be a positive sign.
The cloud computing branch has been a leading part of the company in the past, so better performance elsewhere could make it more well-rounded overall.
Smit said: “The more than half jump in the operating margin is a huge relief that the focus on profitability is already delivering. Amazon is moving into a new phase of lower dependency on AWS.”
Meta
Facebook and Instagram owner Meta reported a 3% increase in revenues in the first three months of the year, with the company taking in $28.6bn.
Overall net income of $5.7bn was 24% lower than the same period last year, but that didn’t stop Meta’s share price launching 13.4% after the results were released.
Lund-Yates said: “Growth is more sluggish than is ideal, but it’s ultimately better than expected. Further momentum is expected to be harnessed in the second quarter, as Meta appears to draw a line in the sand where its advertising declines are concerned.”
Like other tech companies, chief executive Mark Zuckerberg has been on a mission to streamline the business in what he has called a “year of efficiency”.
He cut 11,000 jobs at the end of last year (which accounted for an estimated 13% of Meta’s workforce at the time) before announcing an additional 10,000 layoffs in March.
Lund-Yates added: “Zuckerberg is well aware that his spending habits are being watched very carefully, and any renewed efforts to shift the budget to untested areas won’t go down well.”
Indeed, Zuckerberg’s spending on the Metaverse has come under scrutiny from shareholders, including Mike Seidenberg, manager of the Allianz Technology Trust.
Seidenberg – who has a 5.3% weighting to the company in his portfolio – said that the company has spent billions on the project with little signs of a worthwhile payoff in sight.
“I can live with the Metaverse as a shareholder but I don’t think it will be a success over time,” he said. “In its current vision, I just don’t see it.
“I’d love to see them continue to decrease spending on it – that would be positive for the share price.”
Alphabet
Google and YouTube owner Alphabet announced a 2.6% increase in revenues in the first quarter of 2023, with the company taking in $69.8bn in the first three months of the year.
It was also a beneficiary of staff cuts, freezing new hires in August last year and firing 12,000 employees (6% of the global workforce) in January this year.
However, the increased spending on artificial intelligence (AI) in its recent quarterly results could be a fruitful investment, according to Chris Elliott, manager of the Evenlode Global Equity fund.
It is good to see the company begin to slowly integrate AI to its search engine, which should optimise its advertising services to clients, he said.
“This should boost return on advertising spend and further protect advertising revenues, which have proven resilient in a difficult economic environment.”
Netflix
Markets generally responded positively to tech companies’ quarterly earnings, but the share price of Netflix dropped 3.2% in the day following its results in mid-April.
Despite a 3.8% increase in revenues to $8.2bn in the first quarter, net income of $1.3bn was 18.8% below the same period last year.
Danni Hewson, head of financial analysis at AJ Bell, said that the $9.3bn in net debt on Netflix’s balance sheets is a concern, especially paired with its $2bn in leases and nearly $22bn in content obligations.
“Bears will point to increased competition, the surging cost of content production and spotty cash flow,” she said.