Investment Insight | Mega earnings from mega cap technology firms
Last week over 50% of S&P500 companies reported earnings for the June 2021 quarter. This included all five of the mega cap technology stocks which are Apple, Amazon, Google, Facebook and Microsoft (‘FAAMG’). The sheer scale of these companies means their results are widely followed by global investors, providing valuable insight into the underlying performance of the global economy and the United States equity markets. NZ Funds’ clients have exposure to Apple, Facebook and Amazon, so this week we are providing a brief overview of the earnings performance for these companies.
All the results for the FAAMG companies showed incredibly strong numbers with impressive growth levels relative to prior years. On average, across the five companies, they grew their sales year-on-year by 40% and their Earnings Per Share (‘EPS’) by 92%.
While investors are focused on the year-on-year growth trends shown by company results, they are also looking to see how the results compare to the consensus analyst expectations. Financial estimates (for items such as revenue and earnings per share) are compiled ahead of the results date from each investment bank or broking firm that provides research on the company. At results date, the actual revenue and EPS numbers are compared to the average estimate from these broking firms. Impressively, across the FAAMG companies, the average revenue result beat estimates by 6% and the average EPS beat estimates by 25%.
For the June quarter, Apple reported year-on-year sales growth of 36% and EPS growth of 101%. This was an impressive result, driven by high demand for its iPhone products. Through the June quarter, iPhone sales were $40bn, up 50% from the same period last year. Apple gained market share relative to other phone providers over this period, which is also positive. The only negative from Apple’s results were comments from management regarding increased supply chain pressures in obtaining chips for iPhones. This has slightly dampened sales expectations for the second half of the year. We are not overly concerned by this; over time, we expect the supply chain issues will be worked through, and it is encouraging to see high levels of demand for iPhones.
Facebook also delivered a strong set of results for the June quarter, with revenue up 56% year-on-year and EPS up 100%. Facebook generates most of its revenue from online advertising, and this was the key driver of their strong performance with revenue up 56% year-on-year, driven by two key components:
1. The number of advertisements Facebook delivered was up by 6% year-on-year, and
2. Facebook increased the price of its advertisements by 47% year-on-year.
Facebook’s ability to significantly increase the price of its advertisements – while at the same time still being able to deliver an increase in total advertisements – is a key reason we like the company.
The main negative from Facebook’s results came from slower overall growth in the core ‘Facebook app’, highlighting the maturity of that product and the need for Facebook to continue innovating. To address, this Mark Zuckerberg discussed his plans for the virtual world, in particular what Facebook is doing in virtual reality development. He indicated this will become Facebook’s next growth area. Facebook currently holds more than a 50% market share in virtual reality headsets and is well positioned to be a winner in this high-growth market.
Of the three FAAMG companies that we invest in, Amazon had the weakest results, missing consensus revenue expectations by 2%. However, Amazon still displayed strong growth with sales growing 27% year-on-year and EPS growing 47%. The positive from Amazon’s result was a strong performance in Amazon Web Services, which grew by 37% and continues to sign more large corporate customers to its cloud solution.
However, the key negative of Amazon’s results was a weaker than expected performance from its e-commerce business, which shows signs of decelerating growth as economies reopen following COVID-19 and people spend time on experiences rather than just shopping online.
While we do not currently hold investments in Microsoft and Google, both reported strong results with Microsoft’s EPS growing by 45% year-on-year and Google growing by an impressive 169%. While the underlying performance of both companies is impressive, we see better valuation upside in the other three FAAMG companies at the moment.
The level of growth achieved by the FAAMG companies, which have a market capitalisation over $1 trillion, is amazing. We remain positive on these businesses, both in terms of their underlying performance and from a fundamental valuation perspective. In summary, we are excited to be able to purchase interests in very large fast-growing businesses at reasonable valuations for clients’ portfolios.
All the results for the FAAMG companies showed incredibly strong numbers with impressive growth levels relative to prior years. On average, across the five companies, they grew their sales year-on-year by 40% and their Earnings Per Share (‘EPS’) by 92%.
While investors are focused on the year-on-year growth trends shown by company results, they are also looking to see how the results compare to the consensus analyst expectations. Financial estimates (for items such as revenue and earnings per share) are compiled ahead of the results date from each investment bank or broking firm that provides research on the company. At results date, the actual revenue and EPS numbers are compared to the average estimate from these broking firms. Impressively, across the FAAMG companies, the average revenue result beat estimates by 6% and the average EPS beat estimates by 25%.
| FAAMG* | June quarter 2021 results | ||||||
| Results growth | Year-on-year | Beat/miss vs consensus expectations | |||||
| % vs last year | Sales | EPS** | % beat | Sales | EPS** | |
| 56% | 100% | 5% | 21% | |||
| Amazon | 27% | 47% | Amazon | -2% | 23% | |
| Apple | 36% | 101% | Apple | 11% | 29% | |
| Microsoft | 21% | 43% | Microsoft | 4% | 13% | |
| 62% | 169% | 11% | 41% | |||
| FAAMG Average | 40% | 92% | FAAMG Average | 11% | 41% | |
| * FAAMG = Facebook/Amazon/Apple/Microsoft/Google ** EPS = Earnings Per Share |
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For the June quarter, Apple reported year-on-year sales growth of 36% and EPS growth of 101%. This was an impressive result, driven by high demand for its iPhone products. Through the June quarter, iPhone sales were $40bn, up 50% from the same period last year. Apple gained market share relative to other phone providers over this period, which is also positive. The only negative from Apple’s results were comments from management regarding increased supply chain pressures in obtaining chips for iPhones. This has slightly dampened sales expectations for the second half of the year. We are not overly concerned by this; over time, we expect the supply chain issues will be worked through, and it is encouraging to see high levels of demand for iPhones.
Facebook also delivered a strong set of results for the June quarter, with revenue up 56% year-on-year and EPS up 100%. Facebook generates most of its revenue from online advertising, and this was the key driver of their strong performance with revenue up 56% year-on-year, driven by two key components:
1. The number of advertisements Facebook delivered was up by 6% year-on-year, and
2. Facebook increased the price of its advertisements by 47% year-on-year.
Facebook’s ability to significantly increase the price of its advertisements – while at the same time still being able to deliver an increase in total advertisements – is a key reason we like the company.
The main negative from Facebook’s results came from slower overall growth in the core ‘Facebook app’, highlighting the maturity of that product and the need for Facebook to continue innovating. To address, this Mark Zuckerberg discussed his plans for the virtual world, in particular what Facebook is doing in virtual reality development. He indicated this will become Facebook’s next growth area. Facebook currently holds more than a 50% market share in virtual reality headsets and is well positioned to be a winner in this high-growth market.
Of the three FAAMG companies that we invest in, Amazon had the weakest results, missing consensus revenue expectations by 2%. However, Amazon still displayed strong growth with sales growing 27% year-on-year and EPS growing 47%. The positive from Amazon’s result was a strong performance in Amazon Web Services, which grew by 37% and continues to sign more large corporate customers to its cloud solution.
However, the key negative of Amazon’s results was a weaker than expected performance from its e-commerce business, which shows signs of decelerating growth as economies reopen following COVID-19 and people spend time on experiences rather than just shopping online.
While we do not currently hold investments in Microsoft and Google, both reported strong results with Microsoft’s EPS growing by 45% year-on-year and Google growing by an impressive 169%. While the underlying performance of both companies is impressive, we see better valuation upside in the other three FAAMG companies at the moment.
The level of growth achieved by the FAAMG companies, which have a market capitalisation over $1 trillion, is amazing. We remain positive on these businesses, both in terms of their underlying performance and from a fundamental valuation perspective. In summary, we are excited to be able to purchase interests in very large fast-growing businesses at reasonable valuations for clients’ portfolios.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Andrew Curtayne is Portfolio Manager for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Andrew's comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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